With the Australian property market currently operating at “full-steam”, more political discussion has focused on helping first-time buyers than we’ve heard for a very long time.
The successful remake of the Federal Government’s Home Guarantee Scheme (HGS) has in a matter of a few weeks attracted a sharp increase in loan applications and first homebuyer purchases.
The industry researcher Cotality (formerly CoreLogic) has reported that entry-level homes – the tier that generally attracts both first-time buyers and investors – saw prices increase 1.2% month-on-month in October.
Make no mistake, the HGS is a game-changer for many young buyers.
The Government has undertaken to guarantee 15% of a mortgage deposit so long as the buyer has their 5% lined up.
By meeting this 20% deposit threshold, first homebuyers no longer need to pay Lenders Mortgage Insurance (LMI), which is a one-off, non-refundable fee that costs tens of thousands of dollars and protects the lender in the event you default.
Consequently, young Australians are now able to enter the market faster than they could have ever anticipated.
This rush to market can lead to some first-time buyers making a few wrong assumptions about the buying process. So, below, we have outlined where you need to pay special attention.
HGS warning – It’s a great scheme, but the Government is only underwriting the 15% deposit, not providing the cash. As a result, you will have a bigger mortgage burden because your deposit is just 5%. So, pay careful attention to your level of commitment.
Waiting for perfection – Most young buyers know the property market well enough to realise their first purchase will never be their dream home. That comes later. The dream right now is to get on the property ladder. So, don’t wait around. The perfect time is now.
Credit score – You don’t need an amazing credit score, but you should be able to show a history of borrowing and repayment. When a lender assesses your mortgage application, they’ll take into account your lifestyle expenses. In these circumstances, it pays to be a little frugal for a few months.
Debt is fine – There’s no issue with holding debt, but you’re required to have a third of your gross income cover your mortgage repayments. More damaging than debt is having multiple credit cards. Lenders calculate a percentage of each card’s spending limit and assume you’ll carry this debt. Our advice is to get rid of all credit cards, or hold only one.
Stay within your limits – Being a slave to your mortgage is no fun. Sure, first homebuyers will pull back their spending in the first few years as they adjust to the extra expense. But consider the impact on your lifestyle before buying a home that’s going to stretch the budget.
Size matters – While it’s understandable you want to break into the market, don’t buy a property that isn’t going to meet your needs. If you’re going to leverage the various grants and stamp duty discounts available, you’ll be required to live in the property for 12 months. Don’t buy a home that’s too small. Very quickly, you’ll feel confined and unhappy.
Ongoing costs – Many first-time buyers joke they spend half their weekends at Bunnings! It’s funny because it’s true. The cost of maintaining your home needs to be factored into your budget. On the plus side, every improvement will add value to your property.