It’s always been a bank you can trust, but just how popular is the bank of mum and dad?
New RateCity research shows that half of Gen Y couples now need financial help from their parents to get into the property market.
Parents love to tell their kids they’ve ‘never had it so good’, but when it comes to property, the saying falls flat, with the research showing around half of Gen X couples needed just two salaries to afford their first home, while half of baby boomers needed just one.
Property prices have sky-rocketed in the last five years, particularly in our capital cities, so it’s no wonder a lot of younger people are struggling to outbid cashed-up investors at the point of sale.
In NSW, potential first home owners are also about to take another hit. The state’s first home owners’ grant, which is for new homes only, is scheduled to be scaled back from $15,000 to $10,000 on 1 Jan 2016.
So what are the biggest financial pressures holding under 35’s back?
The RateCity study found the biggest barrier to homeownership was salary, with 68 per cent of respondents indicating they didn’t earn enough to meet the financial commitments a mortgage brings. This was closely followed by cost of living (59 per cent), rising property prices (55 per cent) and rent (22 per cent).
Interestingly, those on a higher income were the ones that felt the rental pinch the most, while the majority of 18 – 24 year olds didn’t rate it as a concern at all, most likely because they are still living at home.
Are parental financial gifts driving inequality?
Recent modelling by economists from Sydney University and RMIT University found that kids who receive a gift of $5,000 or more from a parent are much more likely to own a home than others.
Fantastic news for people whose parents can afford to give them a leg up, but of course, the issue is that this predominantly applies to wealthier families.
Does this mean that lower income families are entrenched in a cycle of renting? Hopefully not. As the researchers explain, their study is hoped to help inform governments when assessing the effectiveness of housing policies and grants.
Perhaps unsurprisingly, a number of young Australians are now opting to be first-time landlords, purchasing property that they can afford but might not necessarily want to live in. A recent Mortgage Choice survey showed that 37 per cent of investors were first home buyers, up from 21 per cent on the previous year.
But the introduction of higher interest rates for investors, which began just six months ago and has now been widely adopted by lenders across the market, is a thorn in the side of these young venture capitalists.
With rates for investors now as much as 1.4 percentage points higher, the extra $100’s in repayments could be enough to deter young investors who only have access to limited funds.
Saving for a deposit is hard to do, particularly if your bank tells you you’ll need a sizeable sum before they’ll even consider loaning you the remainder. But this shouldn’t necessarily be seen as a stumbling block. Deposits of 20 per cent can really work in your favour when negotiating the best possible rate from your bank.
A deposit of 20 per cent or more will also mean you can avoid the added burden of lenders mortgage insurance which can be as high as $14,000.
Tips to buying a home
Cracking the property market for the first time is no mean feat. It requires a lifetime of savings, plus the capacity to meet the monthly mortgage repayments, even when rates rise.
If you can’t quite meet these financial benchmarks, there are some shortcuts you could consider to get your foot on the property ladder faster.
- Consider an investment property. Investment properties do attract higher interest rates but it does mean you aren’t restricted by location. There’s nothing stopping you looking out of town or interstate, as long as you do your research and try to buy in an area where rental demand is high and house prices are likely to go up, not down.
- Get the best rate. Comparing the home loan market and negotiating your home loan rate will save you thousands in mortgage repayments over the life of your loan. Plus, whenever you can afford to make additional repayments, do. A mortgage calculator will show you just how many years you can knock off your loan with deposits of a few hundred dollars here and there.
- Consider buying with a friend. Buying with a friend can be perilous, so you’ll need to weigh up the pros and cons carefully and war-game potential problems such as what happens if one of us wants to sell. But with careful planning it is possible to make it work.
- Move back with your parents. It’s a scary thought but if you sit down and work out how much you’ll save in just one year, not just on rent but on other household bills such as electricity and, if you’re lucky, food, then it might just be worth it.
- Ask your parents to guarantor your loan. Going guarantor can be a great way to convince a bank to lend you money, but it isn’t as easy as getting mum and dad to sign the bottom line. If you default on your loan, your parents will be expected to step in meet the repayments.
If you still can’t afford it, wait another year or two. Despite the hype, the housing market will still be there in a couple of years’ time. It is better to have all the safeguards and buffers you need in place, before you take the property plunge.