Interest rate rises
Interest rate is defined as the amount that you are charged by the bank for borrowing money, shown as a percentage of the total amount of the loan. The higher the percentage, the more you have to pay back for a loan of a given size.
Interest rates fluctuate on a regular basis depending on the RBA (Reserve Bank of Australia). These fluctuations are heavily dependent on the economic state and inflation of Australia. Many first home buyers don’t take this fluctuation into consideration when purchasing their property. Buying at the maximum of your financial means can be a recipe for disaster in terms of keeping up with monthly loan repayments.
Let’s utilise the interest rate rise across Australia for 2022. In 2022 alone, the cash rate set by the RBA increased by 2.5%, meaning that the repayments on your current home loan have potentially increased by 2.5% (this is also entirely dependent on your financial institution). For example, if you borrowed $500,000 over a 30-year period at the start of the year with a variable interest rate at 2.6%, your principal and interest repayments on that loan would have been $2002 per month. 10 months go by, and the RBA have increased the cash rate by 2.5%. Your current repayments now will cost $2715 per month. This is an increase of $713 per month, or an extra $8556 per year.
Some homeowners do not take this interest rate rise into consideration when purchasing their property. This means that as the interest rates rise, the homeowner can no longer afford the repayments, and may be required to sell the property as it is not financially viable to keep.
Periods with no tenants
Similar to the interest rate rise example above, periods when the property is vacant can put added financial stress onto the homeowner, as they will not be receiving a steady form of cash flow during this time.
Ensure that you are able to comfortably make each repayment with or without the property tenanted. This works for both interest rate increases and untenanted periods.
Unexpected maintenance costs
The cost of maintenance of a property can range from small expenses like faulty light globes or broken door handles to very large expenses, such as a broken hot water system or air conditioning unit. These large expenses can range anywhere from $5000 – $10,000, depending on the severity of the fault and the size of the unit. These problems are to be fixed immediately, and all expenses are to be paid by the homeowner (unless covered by insurance).
It is highly recommended to have a separate bank account where money is held for these types of emergency situations. An amount of over $5000 is a good place to start. Each week, a small amount of money should be deposited into the account to protect yourself financially if something were to break in your property.