BEWARE MORTGAGE STRESS

There is no doubt that interest rates on home loans will rise within the next two years. This could cause severe financial strife for people who are overexposed, which is why you should be doing your best to get ahead of your home loan repayments now.

But there are other ways to get caught.

Just recently, I heard about a couple who got carried away by rumours of an impending property boom and grabbed an apartment to ensure they had a foot in what they thought was a rising property market.

Eighteen months later they had a baby, and quickly discovered the apartment was no place for a couple with a child. They then rushed out and bought a house, in the hope that they could sell the apartment for more than they had paid for it, and so increase the equity in the home they had just bought.

They then discovered to their horror that the apartment was worth at least $50,000 less than they had paid for it, which meant the mortgage was more than the property was worth. They were underwater!

They have made themselves particularly vulnerable, because they now own two heavily mortgaged properties, at a time when property prices are unlikely to rise, but interest rates will.

The potential damage to their long-term financial situation is huge.

Anybody thinking of buying property should be aware that the secret of making money in real estate is to buy well and add value. The term “buying well” means the vendor must be highly motivated to sell s enabling you to get a property below market value – the term “add value” is akin to buying the worst house in the best street. Buy a great location and do up the property.

Remember, you cannot add value to an apartment. All it can do is get increasing less attractive when compared to newer ones being built.

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