Avoiding the rental trap

Avoiding the rental trap

With property prices across Australia consistently rising rather than falling, buying your first home may seem discouragingly out of reach. However, a new discussion paper from the Housing Industry Association (HIA) showing that rents are creeping up at a faster-than-usual rate may prompt some tenants to swap renting for home ownership.

Vacancy rates across Australia have remained “historically tight”, according to the HIA’s Observations of Australia’s Rental Market discussion paper released this month, which drives up rental prices. The HIA further reported that the rate of rental inflation surged in the early stages of the global financial crisis and has remained above its two-decade average since then.

“It is likely that rental price inflation will remain relatively brisk for the foreseeable future,” the discussion paper stated.

Making the issue worse is that rising rents are now affecting a higher proportion of the population. According to Swinburne University’s Australian Housing and Research Institute, 4.5 million Australians are currently renting – or twice as many as in 1981.

Financial security

“Ultimately, from a financial planning perspective, it makes good financial sense to own your own home,” said Deborah Kent, owner of Integra Financial Services and NSW State Director of the Association of Financial Advisers.

“While you may be young now and not worried about it, you don’t want to be in the precarious situation of not owning your own home in retirement – it adds an extra layer of financial stress. Rents are high if you don’t have enough to retire on.”

The traditional notion that renting is dead money isn’t necessarily accurate, Kent added – provided you exercise some financial control. “Rent isn’t necessarily lost money if you put some discipline around saving the excess money that you’re not putting into a mortgage,” she said.

“If you have the discipline to save on the side, you can get ahead of the game.”

Swapping renting for home ownership

At the current historically low interest rates, paying a mortgage is comparable to renting in certain areas, Kent added. It is important to remember that interest rates can rise, however, “so calculate how much you can afford to repay if rates rise to 8 percent”.

If you think you can’t afford a mortgage, compromise on location – look at cheaper neighbouring suburbs to your preferred area. Also consider adjusting your lifestyle to help you save a deposit – Kent suggested cutting down on dining out for home dinner parties as one example. “It comes down to discipline,” she said.

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Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

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Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

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A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

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Brokers need to be accredited with a particular lender to be able to work with that lender. A typical broker will be accredited with anywhere from 10 to 30 lenders – the big four banks, as well as a range of smaller banks, credit unions and non-bank lenders.

As a general rule, brokers don’t charge consumers for their services; instead, they receive commissions from lenders whenever they place a borrower with that institution.

Does Real Time Ratings' work for people who already have a home loan?

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How will Real Time Ratings help me find a new home loan?

The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.

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Does each product always have the same rating?

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