Home loans - getting set
FIRST home buyers are having a tough time right now. Property values are rising, interest rates are heading north and to top things off, many banks are tightening their lending requirements, often asking for a more substantial deposit than in the past.
However, despite the hurdles, it is possible to get into the property market, and having a decent deposit works in a home buyer’s favour.
In the days before ‘global financial crisis’ entered our vernacular, plenty of financial institutions were offering 100% home loans, also known as ‘no deposit’ loans.
In fact, some lenders allowed borrowers to take out loans worth more than the value of the property. The idea here was that first timers could borrow enough to cover legal fees, stamp duty - the lot.
I have always been concerned about these loans. Even a small hike in interest rates can put considerable financial pressure on people who’ve borrowed to the absolute limit of their repayment capacity. So I can’t say I’m sorry to learn most lenders have given no deposit loans the flick.
This will come as small consolation to first home buyers struggling to get a foothold in an increasingly expensive property market.
Saving for a deposit in today’s environment is not easy. Sure, interest rates are on the rise, so you’re likely to get a better return on your savings. But according to the RP Data Rismark Home Value Index, house prices nationally rose 11.8% over the 12 months ended January 2010. In Melbourne, values climbed a massive 17.6%. It’s great news for existing home owners but for anyone saving for a first home, it’s a case of moving goal posts.
Nonetheless saving for a first home is achievable. In my experience, those people who pull it off aren’t necessarily high income earners. But they do tend to share some common characteristics.
Most importantly, successful first timers make building a deposit their number one priority. That involves making sacrifices –sometimes big ones. A colleague of mine moved in with the in-laws while they were saving for a home. She admits it wasn’t the easiest period of her married life but says it got them over the line in terms of their deposit.
Saving a deposit also requires planning. Knowing how much you need to tuck away on a regular basis can help you develop the discipline it takes to grow your savings, and the motivation to reach your goal. Set yourself some savings targets using one of the online savings calculators on websites like www.infochoice.com.au.
Finally, it’s worth remembering that your first home is unlikely to be your dream home. It is typically a stepping stone to a better property further down the track. That can mean buying your first home in a less desirable, though more affordable suburb or opting for an older/smaller property than you would like. While it’s a compromise, you’ll at least gain a foothold in the market, giving you the benefit of the long term price appreciation that’s making it so hard for many first home buyers to build a deposit.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Financial Literacy Foundation and chief commentator for Money Magazine.