Bank of mum and dad' popular choice for first home buyers

Bank of mum and dad' popular choice for first home buyers

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.

Watch the Channel Nine News report

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.

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First-time landlords

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.

Deposits

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

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Learn more about home loans

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.