High prices of properties, stagnant wages, unemployment and talks of a property crash are just a few of the fears of first home buyers. But the lure of stamp duty exemptions and first home owners grant are pulling first home buyers to get into the market. After a five-year bull run during which home prices have gone up 75% in Sydney and 56% in Melbourne, the property market is going sideways with less competition from investors. Thanks to a combination of tough APRA lending rules and new taxes on foreign buyers, Sydney and Melbourne buyers have the opportunity to get into their first homes.
So what is stopping Australian first home buyers from taking that plunge and what are the possible ways you can overcome your fears?
Price
It is your first home and you don’t want to make a mistake by paying too much. You are getting into a 30-year loan and the worst that you don’t want to happen is to get into a property that would fall in value by 10% and get into negative equity where the mortgages are more than the value of the house.
Another problem is that houses have become so expensive that most of them are now way above your budget. The only way to avoid this mistake is to do your research and find out how much properties have sold in the suburb you are eyeing.
Going into debt
Who wants to be burdened by a 30-year debt? You have been living without debt and committing to one is not a lovely thought. Not all debts are the same. There is a difference between bad and good debt. An example of a bad debt is a motor vehicle that depreciates in value once it gets out of a car dealership. Wealthy people use debt as a leverage to purchase properties or shares that increase in value over time. You also don’t have to stay with the loan for 30 years. You can do extra repayments so you can reduce the term by 5, 10 or 15 years. A mortgage broker can educate you on how you can pay the debt faster.
It’s too hard to get a loan
You don’t have to go to every bank and do your research on which lender and which loan product will work for you. A mortgage broker is there to help you do that. Mortgage brokers understand the different lending policies of different banks and can provide you with the most suitable lender and strategy based on your financial situation.
You don’t have enough deposit
You don’t need a 20% deposit. There are a few lenders willing to lend you with only a 5% deposit. If you purchase a property in Melbourne for less than $600,000, you don’t even have to pay for stamp duty. This exemption and the $10,000 grant for brand new homes will get you into your home sooner.
Have you heard of family guarantee where the 20% of the deposit can be secured by your parents’ property?
Interest rates
What if the interest rate goes up, can you still afford the repayment of the loan? This is a real concern for buyers who are likely stretching themselves to get the home of their dreams. A 1% rise in interest rate on a $500,000 loan will increase the repayment by $297 per month. There is no crystal ball that will tell you where the rate is headed in the next one to two years. Lenders are getting tougher and the way your borrowing capacity is assessed is to test whether you can afford the loan even if it goes up by 2% to 3%. Once you have a mortgage, do a home loan health check with your broker so you know that you are getting the best rate from your lender.
The best thing you can do today is to speak to a transparent finance broker and do your research on areas or suburbs that you would like to live in. Education is the key and the more you know, the more you are able to make an informed decision about the biggest debt you will ever take on in your life.
This article is for general information only and should not be considered personal financial advice. Before making a financial decision, you should seek independent advice from a mortgage broker, financial planner or an accountant.
Maria Papa is a senior finance expert specialising in home loans, investment loans, self-employed loans, Lo Doc loans, car loans, personal loans and loan protection. She has offices in Sydney and Melbourne. If you have questions, you can call Maria at 0430 144 008 or email her at maria.papa@loanmarket.com.au.
