Angie Zigomanis from research and forecasting group BIS Shrapnel says three years ago, Australia experienced record housing unaffordability, which has eased this year with lower rates and property prices. But the median house price is still an eye popping $600,000
''Affordability is pretty stretched, however it is not necessarily as bad as it was in 2008, when interest rates peaked at 9.5 per cent,'' Zigomanis says.
The new levels of unaffordability have meant first-home buyers have needed to adjust their expectations to meet the market. ''Rather than getting the same house in the suburb they are already renting in, they may get something smaller like the townhouse or move to a more affordable suburb, an outer suburb,'' he says.
With a hiatus in house pricing and interest rates expected in the next 12 months, it is time to get organised. Zigomanis says: ''It is a good time to save up a bigger deposit without prices getting ahead of you.''
Last week Westpac's chief economist, Bill Evans, went against the consensus view of most economists, predicting rates would fall 1 percentage point by September next year.
With a hiatus in house pricing and interest rates expected in the next 12 months, it is time to get organised. Zigomanis says: ''It is a good time to save up a bigger deposit without prices getting ahead of you.''
Last week Westpac's chief economist, Bill Evans, went against the consensus view of most economists, predicting rates would fall 1 percentage point by September next year.
And with three-year fixed rates at about 7 per cent - similar to variable rates - first-home buyers may be encouraged to take the plunge.
EXPECTATIONS
Property and finance author Peter Cerexhe says young people have always had to compromise when it comes to purchasing their first home but says recent record unaffordability levels have been occurring at a time when people have higher expectations for how they would like to live.
''Twenty, 30 years ago, a young person buying a house was happy to have anything they could get and one day hoped to have a home like their parents,'' he says. ''Ten or 15 years ago people wanted the type of home their parents might be in when they retired. We're now in a period where expectations have been raised higher and first-home buyers want something better than their parents had.''
Cerexhe says these desires are being driven by the materialistic culture and renovation shows, and first-home buyers can make bad decisions if they're on the lookout for a new kitchen and bathroom.
''The danger is that - particularly inexperienced people - if they want something shiny and new they'll be tempted to buy in a place with poor capital growth, a place that will not be a good investment,'' he says.
LAUNCHPAD
Cerexhe says first-home buyers in particular should approach their purchase as an investment, even if they plan to live in the property.
''The first property is almost always a stepping stone to something you truly could live in longer term. If you don't get a good investment then you won't be able to make the leap to a bigger home,'' Cerexhe says. ''Wherever you buy, it's not going to be where you end up, that's the dilemma that faces first-home buyers. Indeed, they need to be looking to later steps and choose a first property that will give them a bigger deposit when they are older and earning more money. They will still need a whopping deposit to buy a house they'd really be happy with. The danger is to not look to the future,'' Cerexhe says.
''Location remains the No.1 rule of real estate, not to be tempted to buy a shiny new property in a bad area. Do your research, find what the growth is like in certain areas and how that compares to other suburbs.''
James Rice, 28, and Bronwyn Morgan, 32, have recently purchased their first home: a two-bedroom apartment in Freshwater, a suburb in Sydney's northern beaches. Rice says they kept the No.1 rule of real estate in mind.
''Location was crucial. The main concern was to live where we want to live and not be too far from work but also be close to the beaches. All the suburbs near the beach - they never seem to go down.''
Rice says the mortgage is costing the couple $200 more each week than rent in the same area and they've found it easy to cover this by curbing their spending on pubs and restaurants. ''We were spending at least $300 a weekend going out before,'' he says.
''It really makes sense [to buy], we should have probably done it earlier,'' Rice says. ''Our aim for the next three years is to pay as much off as we can, then we'll reassess and try to buy a bigger apartment and keep this as an investment.''
Bec Steward is another first-time home-buyer with her mind to the future with her recent purchase of a one-bedroom apartment in Melbourne's fashionable inner-city suburb, Prahran.
Steward researched a variety of options before making her decision.
''I had always planned to buy an apartment in the inner south-east but during the process I was just feeling a little disheartened by some of the prices of apartments so I did look at a house further out,'' she says. ''But ideally, in five to seven years, I'd like to buy my second property and keep this as an investment - and with the inner-city location, I'll get a really great rental return on that.''
Steward, 26, has been putting money into a savings account for four years since starting her job as an account executive in an advertising agency and has been living at home to boost her savings. ''Of my group of friends I'm the last to move out of home but the first to buy my own home. My family has really helped with that, I know that some of my friends couldn't live at home with their family,'' Steward says.
Steward managed to save a 10 per cent deposit for her apartment and her mother is acting as guarantor for a further 15 per cent of the purchase price.
''The deposit is all mine and she doesn't have to give me any money for it. If I default on that they'll knock on mum's door but I'm really comfortable with the size of my repayments and, worst case scenario, if I do need to move out of the apartment then back home, just to get ahead, she's happy with that as well,'' Steward says.
PARENTAL ASSISTANCE
Mortgage broker Paul McCombe from McCombe Finance says parental assistance has become increasingly common. ''It's getting harder for first-home buyers to get a deposit together with the rental market increasing and the cost of living going up as well. We're seeing a lot of them using parental guarantees or non-refundable gifts from parents. It's very rare you see someone who is a first-home buyer who has sufficient genuine savings.''
McCombe says parental gifts and guarantees help first-home buyers avoid the high costs of lenders' mortgage insurance, which is paid on loans if the deposit is less than 20 per cent, and it also helps them secure a loan.
''It's a hell of a lot harder for a first-home buyer to get a loan. The assessment criteria the banks are using is a lot tighter. The main reason for that is because there was an increased amount of defaults of first-home buyers after the global financial crisis,'' McCombe says.
In the past 18 months, the banks have introduced a points-scoring system to assess home-loan eligibility.
''We've had applications in the past 12 months that have looked good on paper, met the bank's published credit policy and yet the point-scoring system has caused it to fail,'' he says.
In addition to being able to show regular savings and having a decent deposit amount, McCombe's tips for improving your eligibility on the point-scoring criteria are to keep a clean credit report by paying bills on time and not applying for a number of credit cards; pay off personal loans; and always pay rent on time because lenders might request a rental statement.
ANTICIPATE THE EXTRA COSTS
Financial planner Sunshine Estivo from Omniwealth says first-home buyers should be aware of all the associated costs of buying a home, which can be as high as 10 per cent of the price.
''Because they've never had the experience of buying property, first-home buyers don't know and real-estate agents don't tell you, 'By the way, have you got the extra 5 per cent for the stamp duty?', and so forth.''
After stamp duty, the highest cost is generally lenders' mortgage insurance, Estivo says.
''It's an exponential scale, if you're borrowing at 80 per cent [of the price of the property] it's zero, at 85 per cent it might be 1 per cent of the purchase price, if you go to 90 per cent, it might be 3 per cent of purchase price. This is where it might be quite expensive to get into your first home,'' Estivo says.
''Some banks will add the mortgage insurance to your loan as opposed to you having to have the cash upfront - it's problematic because you end up paying a lot more for it [in interest over the life of the loan] but it's beneficial because you don't have to have that $5000 or $8000 upfront to get your property,'' she says.
IDEAL DEPOSIT SIZE
''The ideal would be to have the 20 per cent deposit plus 5 per cent of costs but if you overlay that across the median house price of $600,000 then you're asking the first-home buyer to have $150,000 cash, which is a lot of money.''
Estivo says the most important part of your financial plan is knowing you can afford the mortgage.
''It's not just about having enough of a deposit. In the instance of having a $600,000 home, if you have a 5 per cent deposit you'll have a $540,000 mortgage and can the person afford that?''
INVESTMENT PROPERTY SOLUTION
Property author and adviser Margaret Lomas says sometimes the best way to own your own home is to become a property investor first. Lomas says the earlier in your life you get your foot into the property door the better.
''These days if we choose to live in cities, property is going to be unaffordable at least into your 30s, maybe into your 40s. If you wait that long until you buy property you will be behind the eight-ball,'' Lomas says.
''The dream of becoming a property owner is still alive but it needs to be tweaked a little. First-time property buyers need to understand it's about getting on the property ladder in some way but it doesn't have to be as an owner-occupier,'' Lomas says.
''It's much cheaper to rent than buy, so why not rent where you want to live, save the difference with what you would have paid for a mortgage, and become a landlord? You get a tenant to pay the mortgage for you where you get to benefit from the growth on that capital asset.''
Whether you buy your first home as a launchpad to your next one, or you start with an investment property, Lomas reiterates the importance of researching to find a good location.
''The best advice is don't make it about the property. Make it about the area first and do that research, which uncovers whether or not potential growth exists.''
EXPECTATIONS
Property and finance author Peter Cerexhe says young people have always had to compromise when it comes to purchasing their first home but says recent record unaffordability levels have been occurring at a time when people have higher expectations for how they would like to live.
''Twenty, 30 years ago, a young person buying a house was happy to have anything they could get and one day hoped to have a home like their parents,'' he says. ''Ten or 15 years ago people wanted the type of home their parents might be in when they retired. We're now in a period where expectations have been raised higher and first-home buyers want something better than their parents had.''
Cerexhe says these desires are being driven by the materialistic culture and renovation shows, and first-home buyers can make bad decisions if they're on the lookout for a new kitchen and bathroom.
''The danger is that - particularly inexperienced people - if they want something shiny and new they'll be tempted to buy in a place with poor capital growth, a place that will not be a good investment,'' he says.
LAUNCHPAD
Cerexhe says first-home buyers in particular should approach their purchase as an investment, even if they plan to live in the property.
''The first property is almost always a stepping stone to something you truly could live in longer term. If you don't get a good investment then you won't be able to make the leap to a bigger home,'' Cerexhe says. ''Wherever you buy, it's not going to be where you end up, that's the dilemma that faces first-home buyers. Indeed, they need to be looking to later steps and choose a first property that will give them a bigger deposit when they are older and earning more money. They will still need a whopping deposit to buy a house they'd really be happy with. The danger is to not look to the future,'' Cerexhe says.
''Location remains the No.1 rule of real estate, not to be tempted to buy a shiny new property in a bad area. Do your research, find what the growth is like in certain areas and how that compares to other suburbs.''
James Rice, 28, and Bronwyn Morgan, 32, have recently purchased their first home: a two-bedroom apartment in Freshwater, a suburb in Sydney's northern beaches. Rice says they kept the No.1 rule of real estate in mind.
''Location was crucial. The main concern was to live where we want to live and not be too far from work but also be close to the beaches. All the suburbs near the beach - they never seem to go down.''
Rice says the mortgage is costing the couple $200 more each week than rent in the same area and they've found it easy to cover this by curbing their spending on pubs and restaurants. ''We were spending at least $300 a weekend going out before,'' he says.
''It really makes sense [to buy], we should have probably done it earlier,'' Rice says. ''Our aim for the next three years is to pay as much off as we can, then we'll reassess and try to buy a bigger apartment and keep this as an investment.''
Bec Steward is another first-time home-buyer with her mind to the future with her recent purchase of a one-bedroom apartment in Melbourne's fashionable inner-city suburb, Prahran.
Steward researched a variety of options before making her decision.
''I had always planned to buy an apartment in the inner south-east but during the process I was just feeling a little disheartened by some of the prices of apartments so I did look at a house further out,'' she says. ''But ideally, in five to seven years, I'd like to buy my second property and keep this as an investment - and with the inner-city location, I'll get a really great rental return on that.''
Steward, 26, has been putting money into a savings account for four years since starting her job as an account executive in an advertising agency and has been living at home to boost her savings. ''Of my group of friends I'm the last to move out of home but the first to buy my own home. My family has really helped with that, I know that some of my friends couldn't live at home with their family,'' Steward says.
Steward managed to save a 10 per cent deposit for her apartment and her mother is acting as guarantor for a further 15 per cent of the purchase price.
''The deposit is all mine and she doesn't have to give me any money for it. If I default on that they'll knock on mum's door but I'm really comfortable with the size of my repayments and, worst case scenario, if I do need to move out of the apartment then back home, just to get ahead, she's happy with that as well,'' Steward says.
PARENTAL ASSISTANCE
Mortgage broker Paul McCombe from McCombe Finance says parental assistance has become increasingly common. ''It's getting harder for first-home buyers to get a deposit together with the rental market increasing and the cost of living going up as well. We're seeing a lot of them using parental guarantees or non-refundable gifts from parents. It's very rare you see someone who is a first-home buyer who has sufficient genuine savings.''
McCombe says parental gifts and guarantees help first-home buyers avoid the high costs of lenders' mortgage insurance, which is paid on loans if the deposit is less than 20 per cent, and it also helps them secure a loan.
''It's a hell of a lot harder for a first-home buyer to get a loan. The assessment criteria the banks are using is a lot tighter. The main reason for that is because there was an increased amount of defaults of first-home buyers after the global financial crisis,'' McCombe says.
In the past 18 months, the banks have introduced a points-scoring system to assess home-loan eligibility.
''We've had applications in the past 12 months that have looked good on paper, met the bank's published credit policy and yet the point-scoring system has caused it to fail,'' he says.
In addition to being able to show regular savings and having a decent deposit amount, McCombe's tips for improving your eligibility on the point-scoring criteria are to keep a clean credit report by paying bills on time and not applying for a number of credit cards; pay off personal loans; and always pay rent on time because lenders might request a rental statement.
ANTICIPATE THE EXTRA COSTS
Financial planner Sunshine Estivo from Omniwealth says first-home buyers should be aware of all the associated costs of buying a home, which can be as high as 10 per cent of the price.
''Because they've never had the experience of buying property, first-home buyers don't know and real-estate agents don't tell you, 'By the way, have you got the extra 5 per cent for the stamp duty?', and so forth.''
After stamp duty, the highest cost is generally lenders' mortgage insurance, Estivo says.
''It's an exponential scale, if you're borrowing at 80 per cent [of the price of the property] it's zero, at 85 per cent it might be 1 per cent of the purchase price, if you go to 90 per cent, it might be 3 per cent of purchase price. This is where it might be quite expensive to get into your first home,'' Estivo says.
''Some banks will add the mortgage insurance to your loan as opposed to you having to have the cash upfront - it's problematic because you end up paying a lot more for it [in interest over the life of the loan] but it's beneficial because you don't have to have that $5000 or $8000 upfront to get your property,'' she says.
IDEAL DEPOSIT SIZE
''The ideal would be to have the 20 per cent deposit plus 5 per cent of costs but if you overlay that across the median house price of $600,000 then you're asking the first-home buyer to have $150,000 cash, which is a lot of money.''
Estivo says the most important part of your financial plan is knowing you can afford the mortgage.
''It's not just about having enough of a deposit. In the instance of having a $600,000 home, if you have a 5 per cent deposit you'll have a $540,000 mortgage and can the person afford that?''
INVESTMENT PROPERTY SOLUTION
Property author and adviser Margaret Lomas says sometimes the best way to own your own home is to become a property investor first. Lomas says the earlier in your life you get your foot into the property door the better.
''These days if we choose to live in cities, property is going to be unaffordable at least into your 30s, maybe into your 40s. If you wait that long until you buy property you will be behind the eight-ball,'' Lomas says.
''The dream of becoming a property owner is still alive but it needs to be tweaked a little. First-time property buyers need to understand it's about getting on the property ladder in some way but it doesn't have to be as an owner-occupier,'' Lomas says.
''It's much cheaper to rent than buy, so why not rent where you want to live, save the difference with what you would have paid for a mortgage, and become a landlord? You get a tenant to pay the mortgage for you where you get to benefit from the growth on that capital asset.''
Whether you buy your first home as a launchpad to your next one, or you start with an investment property, Lomas reiterates the importance of researching to find a good location.
''The best advice is don't make it about the property. Make it about the area first and do that research, which uncovers whether or not potential growth exists.''
Source http://www.smh.com.au/
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