The numbers of first homebuyers in the market are at historic lows, according to official data, but those numbers may not paint the full picture.
In fact, according to the Australia Bureau of Statistics (ABS), first homebuyers are defined as persons entering the home ownership market for the first time as owner occupiers. First time investors are not included in the ABS’s monthly data-sets, so we perhaps don’t know the full story about how difficult it is, or isn’t, to get into the market today.
There’s no doubt, however, that buying your first property is tricky – but it always has been that way. Saving the deposit has long been a stretch and today’s property prices are certainly not making it any easier for young people.
So do I believe that it’s tougher for first homebuyers today than it was for previous generations? Well, my answer is yes and no.
What is becoming increasingly more difficult is the ability for young people to save a deposit because as soon as they start earning an income, they have greater needs and they seem to want to do everything straight away. They seem to travel a lot more than we ever did and the generations before. So, when I say yes I think it’s because of the deposit that is required to buy a property today.
One of the reasons I say no is if young people can’t afford a home loan now with record low interest rates of four per cent, when are they ever going to be able to afford one?
Let’s take a look at some comparative numbers to illustrate what I mean. If we think about the home loan environment 10 years ago, interest rates were 10 per cent. The average home loan was $500,000, so that loan cost you $50,000 in interest per annum. Now it might cost you a $1 million but interest rates are at five per cent so it’s still only costing you $50,000 per year in interest.
Today loan serviceability is the same as it was 10 years ago, and in some cases it’s more affordable, but I admit that first homebuyers need to get some sort of deposit together to even qualify for a loan.
It’s clear that the biggest impost and hurdle for first homebuyers to get into the market is the ability to save that deposit. And that’s where the “‘Bank of Mum and Dad” are coming into play because banks were wise enough, some time ago, to start allowing guarantors (that’s usually mum and dad) to help young people get into the market. You can read more about these types of loans on my website (LINK).
It’s important for young people to understand, however, that even if their parents offer up some of their equity (or cash) as a deposit, they still need to show that they are capable of meeting the loan repayments.
Lenders want to see some sort of saving capacity or at least making their rental payments on time. This is because very rarely will someone with nothing, who has saved nothing or paid nothing off, be able to get a home loan. The banks will look at these types of borrowers more strictly, even if they have a deposit supplied by alternative means.
A home loan is about a commitment and discipline because you can’t just walk away from your home loan. It’s an ongoing commitment that stretches over decades.
So, yes, it is hard to save the deposit but I don’t believe it’s impossible. One of the first things that young people can do to improve their attractiveness to lenders is to prepare a budget and to start saving.
I know this sounds simple but many young people I’ve meet through my business often don’t have a clue how much it costs them to live. They don’t even know what they might be capable of saving and very few have an idea about what their commitments will be once they a mortgage. Many say they can meet home loan repayments but often don’t have the ability to prove that.
With the bad ones, once we get them to do a budget, they realise they’re actually spending more than they’re earning. They may also a number of credit cards and personal loans for cars and things of that nature, which all reduces their ability to qualify for a home loan.
Saving a deposit is hard, but if young people can control their debt position and understand what they spend over what they earn then they’re in a much better financial position.
Banks do want to lend money for home loans because that is their core business, but they also want to make sure that borrowers are able to meet their repayments and are serious about that commitment over the many years ahead.