Timing tips on stacking mortgage debt

Interest rates might be at record lows but does this present the best time to take out mortgage debt? Not necessarily and here's why.

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Interest rates are at all time lows but does this mean it’s a good time to take out a mortgage and stack on more debt?

It’s important to keep in mind that we are now at the bottom of the rates cycle. It’s unlikely that they will go much lower, and they will inevitably start to rise – possibly in the next 12 months.

RBC Capital Markets chief economists Su-Lin Ong believes that the official cash rate, which influences mortgage rates, will be cut from the current setting of 1.5 per cent to 1.25 per cent early next year, before rates bottom.

There is a risk in taking on too much debt when interest rates are low, and then not being able to afford repayments when rates rise.

So how do you know how much debt is right for you?

  • Some of the considerations include:
  • Risk tolerance/appetite
  • Level of disposable income
  • Whether the purchase is for investment or lifestyle.

It’s important to get the balance right, particularly in the current hot property market where buying the ideal home may mean significant sacrifice and stress.

To work out if the debt would continue to be serviceable when rates rise, factor in rates being at least two per cent higher than they are, but that everything else – income and other financial needs – remains the same.

Then ask, could you still comfortably meet repayments at this level?

A good tactic is to stress test repayments. Increase the current regular mortgage repayment as if rates were two per cent higher than they are or, if renting, put the equivalent extra two per cent into a separate bank account.

Do this for three months at least, before deciding whether or not it is sustainable.

To really test the affordability of debt, couples should factor in the impact career breaks will have on their ability to meet mortgage repayments.

This can be particularly stressful for women, who may feel under pressure to keep earning an income to pay off a mortgage, instead of taking a career break to start a family.

So part of the consideration about taking on a mortgage, should be also thinking about whether having children is part of the short or medium term future. For a lot of families, the real cost of having children is the loss of the second salary.

If the household budget can’t stretch to meet these demands, then taking out a bigger mortgage now, when rates are historically low, is not a good idea.

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