A simple way to have more to spend
Selecting the right home loan with a low interest rate can help you get through to auction and improve your chance of winning the property on the day.
All things being equal, does a lower interest rate give you a competitive edge at auction day?
Maximise your savings & bidding potential
In a fast-paced and competitive environment, attending an auction for the first time can be a stressful proposition. Familiarising yourself with the market value of the area, determining your pre-bidding limit and understanding the process of auctioning can help you secure a place at auction and bidding successfully on the day.
We demonstrate how a low rate loan could give you the upper hand when bidding against property-hungry competitors at auction day. In a hypothetical situation, we compare how a lower interest rate could see you borrowing up to $515 100 more compared to a loan with a less competitive rate.
As your home loan determines the amount you want to spend on your first home, it is important that you don’t let interest rates reduce any savings you can make on auction day. Ultimately, finding a loan package with a competitive interest rate will mean that you have leverage to outbid other people during auction.
Auction advice from The Block 2015 contestants
He who has the lowest interest rate, wins the auction
By obtaining a low interest loan, you will be able to borrow more from your lender due to higher serviceability of your loan repayments. That is, low interest loans see you making smaller monthly repayments as you have less interest to repay.
Loans with a competitive interest rate will receive less impact from official rate rises as the interest is lower to begin with, so you will not be susceptible to interest rate fluctuations.
Ultimately, a low interest loan will provide you with increased purchasing power as the lender will perceive you be in a stronger position to afford your monthly repayments and you can put more money towards your bidding limit.
How do interest rates affect your purchasing power?
We’ve created a hypothetical situation to illustrate the difference in purchasing power between a loan with high interest, compared to one with a lower interest rate.
Josh and Skye have their heart set on a stunning 3 bedroom home in Newcastle valued at $700 000. They are looking to take out a loan with an interest rate of 5.25% over a 30 year timeframe. With a joint weekly net income of $1500, two dependent children and a combined credit card limit of $5000, they can borrow just $509 000 for their loan.
On the other hand, Matilda and James have their eye on the same property in Newcastle, and they also plan to attend the auction next month. With the exact same loan period, joint weekly net income, two children and combined credit card limit, they were fortunate enough to find a lender that offered a lower rate. With this lower interest rate of 4.25%, they can borrow up to $566 000 for their loan.
|Property Value||Joint Weekly Net Income||Number of Dependents||Credit Card Limit||Interest Rate||Borrowing Amount|
|Josh & Skye||$700 K||$1500||2||$5000||5.25%||$509 000|
|Matilda & James||$700 K||$1500||2||$5000||4.25%||$566 000|
From this, we can see that by finding a loan attached to a lower interest rate, Matilda and James have increased purchasing power. With the ability to borrow $515 100 more than Josh and Skye, they have a higher threshold for their bidding strategy and would be more inclined to win the property at auction.
In turn, this could put them one step closer to securing their future home in Newcastle.
By owing less interest on your mortgage, you benefit from gaining mortgage pre-approval and by having increased leverage to bid higher during auction.
Get the edge at your next auction by comparing the loans below
When evaluating your financial situation, and the type of home loan you have taken out, it will be more attractive to the lender if your loan incorporates a low-interest rate as this carries less risk. Therefore the lender may be more inclined to approve your mortgage pre-approval application if they feel confident that you can meet your mortgage repayments.
Before heading to auction, you will need to apply for mortgage pre-approval with your nominated lender. During this process, your lender will assess your ability to make your mortgage repayments based on factors such as your deposit amount, personal income and expenses such as existing loans or credit card accounts.
Applications may be declined if you have a poor credit rating, if you have several enquiries on your credit file, if interest rates have increased significantly or if you need to borrow more than 80% of the property value.
However, given that you meet all of the given criteria and with a competitive loan rate, your lender should approve your application and you should have a good chance of bidding strategically at auction day.
If you win the auction, you will be required to pay a deposit that is 10% of the purchase price. This amount will need to be paid on completion of the auction, so ensure you have these funds available on the day.
Additional features to consider
While a low interest loan can give you a competitive edge to proceed to auction, and to bid more competitively on the day, it is important to realise that there are other home loan features that could also impact your ability to secure a property.
Redraw facilities, ongoing fees, application fees and offset accounts are just some additional features to consider when selecting your home loan. These features can also influence your ability to repay your mortgage and bid more strategically at auction.
Taking out a low-interest loan could potentially increase your probability of getting through to the auction, and bidding successfully on the day. This is because you will have the leverage to bid higher than those who have a lower bidding threshold due to the higher interest that they have to repay on their mortgage.
As previously mentioned, there are several home loan features that could also impact your ability to secure your first home, both before and during auction day.
We wish you all the best in your auctioning!