The housing cost conundrum

The combined impact of house price and interest rate determines a monthly loan repayment on a home loan. So if interest rates are low, as now, people can pay more for a similar home than we did but the repayments still remain similar to when we borrowed @ 11.5% p.a.

But the house price never varies from the day of purchase, whereas the interest rate can rise. So it is not that simple! Paying a higher price for the house with low interest rate borrowings to begin with, poses a far greater risk to the borrower.

If the interest rate were to rise from 3% to 9% on a $700,000 loan the interest would rise from $1,750 a month ($21,000 pa) to $5,250 a month ($63,000 pa), quite a difference.

Assessing how much to pay for a house is not as simple as looking at the quoted monthly repayments, unless the interest rate is fixed for the term of the loan, which is unlikely.

For home buyers, a touring holiday of inland cities and towns in their state might reveal a beautiful environment where housing is a quarter of the price of capital city housing; people are nicer because the population is smaller and people get to know their neighbours and communities; the air is cleaner and healthier; there are more wide open spaces for children; the land is flatter and better suited to walking or cycling and solar power is abundant.

Just holidaying is fun anyway as well as interesting and informative. It may also open new horizons. Anyone in a debt crisis situation can always contact us at GBAC.

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