House prices: Five tips for navigating rising interest rates and a buyer's market

House prices: Five tips for navigating rising interest rates and a buyer's market
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With the housing market moving from white hot to comfortably warm, home buyers and investors are wondering if now is the time to take the plunge and purchase property or to hold out for potential future savings. 

Average asking prices in main centres have been on a downward trajectory since February and CoreLogic's national House Price Index fell 0.8 percent in April -  the first drop since values dropped 0.2 percent in August 2020. 

However, since the decrease has been matched by a climb in interest rates, the cost of monthly repayments is rising even as prices stabilise and fall. 

The combination of falling prices, interest rate rises and economic tightening across the board mean fewer prospective buyers in the market - putting the power back in the hands of those ready to make an offer. 

That's why Property Apprentice, who've been helping Kiwis into homes since 2010, have teamed up with Newshub to unpack what rising interest rates and a buyer’s market means for you. 

"I think it's one of those ironic things that we call a buyer's market but there's hardly any buyers in the market!" says Property Apprentice CFO Debbie Roberts.

"It's a much better time to be negotiating on property when you're not competing with hundreds of other buyers because you've got the opportunity to negotiate a better deal and there's always people that need to sell."

But while there are benefits to being a buyer currently, there are still potential pitfalls, particularly as interest rates continue to climb.

Here are our top five tips for navigating the changing property market. 

1. Call in the experts

Even for seasoned investors, the process of getting a mortgage approved and then managing repayments can be laborious and complex. A mortgage adviser is your best friend when investing in property because they'll navigate the financial labyrinth on your behalf and advise you throughout the entire term of your mortgage, from drawdown to the last dollar paid off.  

The best part is, while their services are invaluable, there's generally no charge to you for using an independent mortgage adviser since they get paid by the lender when your loan is approved. 

"If you're working with an independent mortgage adviser, they can make sure they're putting your loan application with the best bank for you rather than just the bank that you've been saving with," says Debbie. 

"The mortgage advisor can also help you to reduce the risk of interest rates increasing. They'll look at your overall financial position and see how much flexibility you've got in your budget."

2. Don't get too spooked by rising rates

With interest rates recently at historic lows, the Reserve Bank's .50 base point hike in April set jitters through the market. But Debbie notes the current increases in mortgage rates are relatively modest when looked at through a longer lens. 

"People are freaking out that interest rates are rising but in the grand scheme of things, they're still below average. Leading up to the global financial crisis, interest rates reached the double digits. Nobody's expecting them to get that hard this time around." 

The average one-year interest rate over the previous two decades (excluding the exceptionally low interest rates through COVID) has been almost 6.5 percent. 

"Now that we're seeing interest rates anywhere from four and a half percent, up to about six percent at the moment, they're still below the one year average for the long run," she said.   

As for what that means for your mortgage, Debbie suggests a good rule of thumb: if interest rates are above 6.5 percent then float, or choose short terms while if interest rates are below 6.5 percent then fix for longer terms. 

The only certainty is that whatever your situation, rising rates will have an impact when it comes to repayments, so it pays to know your level of financial flexibility. 

3. Explore your options

While no-one can predict the future with certainty, economists expect interest rates to continue climbing and peak around 2024. If you have an interest rate expiring within the next year or so, check with your mortgage adviser to see if it's worthwhile breaking your current loan in order to refix. 

While you'll likely be switching to a higher rate in the short term, it'll pay off in the long run when you avoid further hikes coming down the pipe.

You also aren't locked into a single expiry date when it comes to fixed interest rates, so investigate your options in dividing up the mortgage and spreading the expiry dates so they aren't all expiring at once. 

"If you've managed your interest rate expiry, you could hopefully lock in a lower interest rate and ride that out so that by the time you have to reset, interest rates could be on the way down," says Debbie.  

Of course, rising interest rates don't just affect mortgages already drawn down and if you're a first home buyer they're going to change how banks assess your application. 

4. Ensure your budget fits your mortgage 

Banks will test the affordability of your mortgage against higher rates than charged today, factoring in future interest rate hikes to determine what mortgage is available to you. Make sure you consider the impact of seven percent interest and beyond on your monthly repayments.

As always, the easiest method to get approved for your mortgage and pay less each month is to ask for less money. Particularly when looking for your first property, remember it doesn't have to be your forever home. Making some compromises: whether it's a few rooms smaller, further out of town or in need of some TLC can all make a huge difference to your finances long term.

"A lot of first time buyers get interested in investing in property and they overleverage themselves by buying a more expensive home," says Debbie.

"But this actually prevents them from investing sooner rather than later. So starting small and working your way up is a much more solid financial plan for most people."

For those already managing a mortgage and eyeing the repayments rise with dread, it could pay to look at your budget to see if there are any areas you could cut costs or even boost your income. Those with the rooms to spare might consider taking on flatmates to contribute to mortgage costs. 

If there is any surplus cash flow, it is generally wise to pay your mortgage off faster when interest rates are lower than average than later when the cost is climbing. 

As for any lump sum of cash sitting in a savings account that is currently earning you next to nothing in interest, you are likely to be better off financially by getting that cash to start working for you one way or another through investment. Head over to Property Apprentice's partners at MI Team for more advice. 

5. Beware trying play the market

While some buyers may be seeing the current market trajectory and deciding to hold out for a potential better price around the corner, attempting to predict the market this way could come back to bite you in your budget.

"You never know what's going to happen next," warns Debbie, stressing that while prospective buyers might qualify for lending today, that could change as interest rates rise. 

"Make decisions based on the facts in front of you today. And if you can get lending today, just understand that you could potentially negotiate a better deal with a lot less stress."

Above all, says Debbie, stay positive about your prospects and enjoy the process where you can.

"This is my favourite stage of the property cycle! Forget the crazy auctions and multiple bids and all that sort of stuff. This is a much more relaxed stage. You can take your time making really good, informed decisions with a lot less pressure."

Wherever you are on your property investment journey, ready to make offers or only just starting to save for your first deposit, head over to Property Apprentice for more assistance.

This article was created for Property Apprentice.