According to the Australian Bureau of Statistics, first homeowner activity has increased by 51% since March 2016. First home buyers now account for just short of 20% of all new home loans.
Whilst housing affordability has improved slightly recently, it is still tough for first home buyers to get onto the property ladder. However, the current low interest rate environment and the recent dip in prices is clearly encouraging more first home buyers.
So, what is the best way to help your kids get into the property market? And is there anything you need to do now?
Challenge has and will always be saving a sufficient deposit
There are two factors that will determine whether a person is ready to purchase their first property:
(1) Cash flow
Do they have a stable and reliable amount of surplus cash flow that they can contribute towards repaying a loan? There are usually two main considerations. Firstly, how stable and consistent their income is expected to be in the short to medium term? This normally requires permanent full-time employment or an established self-employed business. Secondly, do they have good cash flow management and consistently spend less than they earn i.e. are they good savers?
(2) Deposit
Do they have enough deposit to contribute towards the acquisition? Most banks will lend up to 95% of a property’s value. Therefore, first home buyers need to contribute:
(1) a 5% deposit;
(2) pay for the mortgage insurance premium. This is an expense that is charged by the bank if you borrow more than 80-85% of a property’s value. The cost of mortgage insurance is typically in the range of 3% and 4% of the loan amount (at a 95% LVR). A few lenders permit borrowers to add a portion (up to 2%) of the mortgage insurance premium onto the loan. The rest must be paid from cash savings; and
(3) any acquisition costs which could include stamp duty (which may be nil depending on the first home buyer incentive), buyers’ agent fees if you choose to use one and legal fees.
Therefore, typically, first time buyers need to accumulate a sizeable deposit, and this can unfortunately take many years to save (over which time property prices will probably continue to climb).
Having enough deposit is often the primary hurdle to overcome for first time property buyers.
Best way to help is to help yourself first
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