Why cheap money could cost you more

Potential bach buyers should factor in higher interest rate costs for borrowing to ensure they can still afford their purchase down the track. Photo/Kellie Blizard

Eyeing up that bach down the road or perusing the property listings with a view to borrowing more money on the cheap?

You might want to think again, according to financial experts.

While mortgage rates are at rocket-bottom lows making it the cheapest time ever to put money on the house, borrowing at the bottom has its risks.

Liz Koh, a financial adviser at Money Max, said the biggest mistake people made when borrowing on low interest rates was failing to leave themselves any wiggle room for when rates head back up.

"If you mortgage yourself to the hilt, when rates rise - and you know they are going to go up at some point - you've got no wriggle room."

The long term average interest rate for mortgages in New Zealand is around 8 per cent.

Koh said New Zealand's current low inflation meant there was a very different environment for interest rates than in the past but she recommended people consider adding an extra 2 percentage points to the bank rates to see how much the payments would be if rates rose over the medium term.

"Would that still be affordable?"

Koh said borrowing up to the maximum also left people exposed if they had something go wrong like a major health problem, job loss or an unexpected baby on the way.

"If you suddenly needed to get your hands on $20k could you?"

Koh said people needed to consider if they lost their income whether they would have enough money to tide them over until they find another job.

Experts typically recommend people have three months worth of expenses available in emergency savings.

Would that still be affordable?

Liz Koh

Koh said that money could come from un-draw credit like a revolving mortgage account where people had been putting their savings but relying on a credit card was a big no-no.

"You don't want to resort to credit cards with high interest."

Jeffrey Stangl, a senior lecturer at Massey University's economics and finance department, said low rates tempted people to borrow as much as they could because buying a home was often caught up with strong emotions.

"They lose rational perspective because buying a home is a very emotive thing. Rational perspective just goes out the window."

Stangl said if people were then forced to sell it could end up costing them more than they expect.

"If you are forced to sell it might not be the optimal time."

If the economy turned down and people lose their jobs it could create a situation where more people were selling at the same time in a falling property market

"When so many people do the same thing, what starts a trickle becomes a flood."

Stangl said people needed to remember that property prices went down as well as up.

Rising house prices had also created a big difference in cost between buying and renting with renting often a much cheaper alternative.

"If you are sitting in the Coromandel this weekend looking at that place just down the road and thinking that's only going to cost X dollars more a month on the mortgage consider if you can rent it much cheaper."

Koh said Kiwis were already over-exposed to property and she recommended people have 50 per cent of the value of their home invested in other assets by the time they reach retirement.

Often a bigger home or a bach were just lifestyle assets.

"It's better to try and live in a moderately priced house and invest in other assets that give capital gain and income."

But she said many people made choices for lifestyle reasons not just financial.

"It's about understanding the consequences of the decisions you make."