Interest rates might be at an all time low but since the global financial crisis, most banks have actually tightened their lending criteria, making it a lot harder for some people to get in to the property game.
The days of getting a loan with no deposit are pretty much over, with most banks upping the minimum deposit amount to as high as 20 percent, putting home ownership out of reach for some Australians.
Why are the banks asking for bigger deposits?
Skyrocketing house prices in some capital cities, particularly Sydney and Melbourne, have seen the property market run hot. This has made the government regulator, APRA, nervous, and not without reason – no-one wants the housing bubble to burst and send our economy into a tail spin.
As a result, APRA has told lenders to keep a check on risky loans, such as:
- loans with small deposits
- interest-only terms for owner occupiers
- loans with very long terms; and
- high loan-to-income loans.
Tips for anyone wanting to crack into the housing market
1. Save up a decent deposit
A deposit of at least 20 per cent is ideal. It means you don’t have to pay lenders mortgage insurance, which can be up in the tens of thousands. Plus, it means you are starting from a good, stable base from which your mortgage repayments will be manageable. A lot of lenders now offer lower interest rates for people with sizeable deposits, so you’ll save there as well.
2. Look for something that’s within your means
If you are just starting out in the property market, start slowly. Look at how much of a deposit you have, and how much you can afford in monthly repayments first. Then add a buffer of at least 2 per cent, if not more, on to the repayments. Interest rates are an all time low right now so the one thing you can be sure of is that they are going to go up, and probably quite a bit. Historically the cash rate over the last 20 years has averaged at 7 per cent so bear this in mind when you are crunching the numbers.
3. Reduce the number of credit cards you have
Large amounts of credit card debt can affect your borrowing capacity and potentially your credit rating. It’s also counterintuitive to helping you save, rather than spend, so cut those cards up and stick with a debit card linked to a transaction account where it’s a lot harder to get yourself into trouble.
4. Build up a positive credit report
Since last year, lenders now access both negatives and the positives of a person’s credit history. This should be good news for most people because it means you can actively work towards building a positive credit history, which will help you secure a loan. To build up your credit rating start by paying your bills on time. A fixed address and a permanement job are also crucial to showing a potential lender you are a trustworthy borrower.
5. Do your research
Find out which loans require a decent deposit of, say, 20 per cent, and which ones will still let you borrow with a smaller one. Bear in mind that you’ll probably pay higher rates for the one that allows you to make a smaller deposit. You might actually be better off waiting til you have a bit more in the bank and choosing a lender with one of the lowest interest rates.
6. Consider using a guarantor
If you don’t have a big enough deposit for a home loan, you might want to consider asking your parents to be a guarantor. It will help you secure your mortgage and avoid lenders mortgage insurance. Bear in mind though, going guarantor isn’t as simple as signing a couple of forms – if you find you can’t meet your mortgage repayments the bank will then turn to your guarantor to come up the money.
