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If you're like many property hopefuls, the dream of home ownership is getting increasingly out of reach as house prices continue to grow much faster than people's incomes. While rising prices are great for those who already own property, they are making it difficult for first homebuyers and other would-be buyers to get a leg up the property ladder. Despite this, the urge to own a home remains strong among Australians. The latest data from the Australian Bureau of Statistics (ABS) suggest a solid increase in first homebuyers coming into the market over the last 12 months. During last calendar year, there were a total of 129,448 new financed dwellings to first-time buyers, with a value of over $29bn. This compares with the previous 12 months (2005) of 114,068 loans to first homebuyers valued at $25.7bn.
This means: - a 12.9% increase in the dollar value of the first homebuyers loan market, and
- almost a 13.5% increase in first homebuyers
"Most people incorrectly look to the ABS statistic relating to first homebuyers as an overall proportion of new lending," says Ian Grant, CEO, First Permanent. "The real figure they must examine is the actual number of new dwellings financed to first homebuyers." Luke Sheales, national sales and distribution manager with Mortgage House, agrees: "First homebuyers now have an ever-expanding share of the home ownership market compared to, say, 10 years ago. We're seeing a growing number of young people that are completing degrees or returning from travelling the world who have no real deposit but reasonable incomes and are now wanting to get into their first home or investment property."
Choices, choices
Also, unlike in days gone by, first homebuyers now have access to a range of options to help them get into the property market. While many homebuyers are still taking the tried-and-tested route of saving a deposit, many are exploring the myriad of options that has opened up for them. "Historically, a first homebuyer may have been seen as the 'poor cousin' of borrowers in the lenders' eyes. Thanks to more aggressive mortgage insurers, today first-time buyers have a suite of products with a range of features to choose from," says Sheales.
Low- or no-deposit loans, 100%-plus loans and family pledge are fast becoming the main vehicles for many new homebuyers. Soon-to-be-released shared equity mortgages also promise to make home ownership a reality for struggling Australians (see following article for more information).
Lenders are also making it easier for would-be buyers to pool their resources and buy property together with friends, workmates or with family members. "We're finding that first homebuyers are savvier than ever before – they want a good deal on their mortgage and they're prepared to do their homework, search the internet and ask questions," says John Mohnacheff, managing director with BEAT Home Loans. "However, most first homebuyers also have limited budgets."
Money talks
And so, the moment of truth is upon you. You've pored over real estate listings and been through open houses each weekend in search for that perfect home. You finally found one that makes your heart sing – the important question you need to answer is: can you afford it?
As tempting as it may be, there are good reasons for not borrowing to the maximum. Biting off too much to buy a house can place a huge strain on your finances and leave you with very little to spend on your lifestyle and other goals. This also exposes you to a massive risk of default and possibly even bankruptcy. According to Gino Marra, CEO of Carrington National, overcommitting is one of the biggest traps for many first homebuyers: "Just because your lender says you can afford it doesn't mean you necessarily can. Buying a home isn't a noose around your neck but your home is still the biggest asset you'll ever own in your life, so you need to ensure you can afford to make repayments not only on paper but also in real life to avoid losing it."
Let's get real
So how much should you spend on your first home? A good starting point is weighing up your income against your total expenses including the mortgage repayments and other costs involved in buying a home. Your expenses mustn't exceed your income.
A strong rule of thumb is that you shouldn't commit more than 30% of your net monthly income towards the cost of servicing the mortgage. If you have other debts such as credit card payments, personal loans or student loans, or you're buying in inner city areas, your borrowing limit is generally capped around 40%.
If you're borrowing more than 80% of the purchase price you will also need to budget for lenders mortgage insurance (LMI). This is a once-off premium paid to cover the lender against potential losses.
Staying within your limit
Lenders generally assess your borrowing capacity by taking into account how much deposit you have saved and how much you earn. As a general rule, the higher your income and the bigger the deposit you've saved, the more you
can borrow. Lenders will also consider your application based on your past credit history and the type of property you're buying – its size as well as location. There will be additional factors impacting your borrowing power, including whether you own or have owned a property before, and the number and age of your children. Bear in mind that different lenders apply different criteria, so it's not unusual to be rejected by one and be accepted by another.
While more lenders are now willing to lend you more money, it's best not to rush into choosing a lender based solely on how much they're willing to lend. It may not be the best thing for you in the long run, especially if you will be stretched to make repayments.
You need to think beyond the short term and consider future changes in your finances, future commitments and your plans. Don't let your lender, real estate agents, or friends and family push you into borrowing more than you can handle. Lastly, ensure that you have a padding of around 2% factored in on future repayments to account for rate fluctuations.
Your Mortgage NO.72 MAY 2007 |
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