Housing Affordability in Australia - what first home buyers should do before entering the property market.
In this guide we will cover:
The issue of housing affordability in Australia now is very different to what it was six months ago. Since the end of 2007 we have seen interest rates rise, consumer confidence plummet, and global credit markets contract.
So what do these changes mean for first home buyers?
Well, for starters, it's not all doom and gloom.
These changes bring unique opportunities for first home buyers and potentially eliminate some of the barriers to entry that new home buyers were faced with this time last year.
Let's take a closer look. Since 2007:
Already Bought Your First Home?
Did you know that even small savings can make a massive difference to your finances?
Housing Affordability - Run the numbers before you do anything else!
The question of housing affordability is still crucial. Before you take any steps into the property market you should run the numbers and determine if you can truly afford to buy a home.
Can I afford it?
What if I can't afford it?
Don't get disheartened, do something about it! You're not alone.
Pay down debt, build your deposit and take the same steps to get your finances in order that you would if you were preparing to buy your first home. You have nothing to lose from improving your financial position! Keep reading...
Before you enter into anything...
Step back and take a look at things logically.
Don't rush into anything.
Take some time to think about why you want to buy property in the first place. It's not worth sacrificing everything just for the sake of home ownership and ending up miserable. There is more to life than servicing your mortgage. After all, it's typically a 25 - 30 year commitment.
It is important that you get this right. There are some free calculators on the Internet that may help you. Alternatively, Budgets Get Real can help you to run the figures and determine if you can afford the property that you want, and to build a deposit more quickly.
Renting VS Buying
The high cost of servicing a mortgage is one of the major issues regarding housing affordability. The truth of the matter is that you may be better off renting (and saving the amount that you would otherwise spend on mortgage repayments) than buying a property.
This is often an unpopular suggestion in Australia, where home ownership is often referred to as "the Australian Dream"... but it is an important option to consider. After all, Australian's are spending more on their mortgage repayments than ever before, and when you compare Australian house prices to Australian wages, property in Australia is currently amongst the most unaffordable in the world.1
One of the reasons that many people do well with property is that it forces then to put aside money that they may otherwise fritter away. If you have the ability to save a good portion of your income you may be better off using compound interest to your advantage and continuing to rent, or simply save a larger mortgage deposit.
In the end, whether you choose to rent or buy, it pays to begin saving what you'd need for a deposit. Even if no deposit home loans stick around (which I doubt that they will for much longer), there are some very good reasons for why you should save at least 10% to 20% deposit for your first home.
A Guide to Saving a Bigger Deposit
Top deposit building tips:
1. Pay Down Debt
Any outstanding debt will reduce your chances of getting a home loan, and reduce the amount that you can borrow for your first home.
2. Increase Your Savings
3. Review Your Expenses & Create a Budget
Budgets Get Real can give you a clear picture of your current financial position - including all of your income and expenses - from which you can easily create a budget. Use your budget to boost your savings and demonstrate your ability to successfully save money and meet your mortgage repayments.
Shares are another way to grow your deposit, and may provide a better return on investment. Shares can also be a more tax effective way to grow your deposit, depending on how you do it. But don't forget, with the promise of higher returns comes higher risk.
5. Find Some Extra Money
With regular saving you will not only meet your deposit goals, but prove to yourself (and your bank) that you have what it takes to meet your mortgage obligations and own your own home.
One of the downsides from the recent changes is that finding the finance you need may be more difficult. The fact of the matter is that banks have less money to lend than before, so they're going to be more selective about who they lend it to.
It is not necessarily those with the larger incomes who will get the loans, but those who can demonstrate their commitment (and ability) to save and meet the mortgage repayments.
How to Create a Compelling Report to Show your Bank
That you have what it takes to save money and meet the loan repayments -
Show them that you're committed
When you apply for your loan these are the sort of details that you will need to provide.
Showing them that you know exactly what is going on with your finances, and are well prepared, will set you apart from other mortgage applicants.
- The First Home Owners Grant ($7,000)
- Reduced or no stamp duty in your state
- Use of the new First Home Saver Accounts
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1. CHOICE article "Mortgage Stress: your alternatives", Jun 2008.
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