Top 4 tips for dealing with property price growth

Top 4 tips for dealing with property price growth

Do you feel like home ownership is too far out of reach? If you do, constant news of property price growth may come as an unwelcome intrusion every time you open up the newspaper or switch on the TV. However, we’re here to tell you that it’s not all doom and gloom, there are ways you can deal with property price growth, both mentally and practically, to get ahead.

1. Change your mind(set)

No, we’re not suggesting you give up on your home ownership dreams. But what you can do is change from being reactive to being proactive. Instead of flinching every time someone mentions capital growth, why not start doing some research on how to maximise value for your own one-day property? By seeing property value growth as a positive thing for your future self, you might feel less disillusioned on a daily basis.

2. Change your destination

This can be a tough one. If you’ve been hanging out for an affordable four-bedroom home in Sydney’s middle suburbs, you’ve got a long wait ahead of you. However, you can either change the physical location you’d like to live in, or the type of property you want to buy. This simple (but sometimes tough) step could halve your purchase price. As a standout example, a unit for sale in Sydney has an average asking price that is almost have that of a free-standing house, according to SQM Research.

Still want a big house in a big city? According to the same data you could save almost $400,000 by buying an average house in Melbourne instead of Sydney. If you really want to save on the dollars, Adelaide is often touted as the mainland’s most affordable capital – and with good reason. Not only is it the cheapest capital city aside from Hobart to buy a house or unit in, but a free-standing home will cost you less in Adelaide than the national average for an attached unit. Not bad!

3. Increase affordability with math

You may not believe it, but you can make your house more affordable by simply doing some creative math with a home loan calculator and some trusted advice.

The historically low cash rate at the moment has helped to keep interest rates down, and this in itself means the cost of property ownership has decreased. In fact, Malcolm Gunning, president of the Real Estate Institute of New South Wales put it this way in a March 3 statement:

“It is really amazing times because the low interest rates mean that property has never been more affordable despite the high prices.” 

However, you don’t just need to rely on the banks to do their bit. You can be proactive in your home loan comparison, talking to more than a few lenders, including non-bank suppliers, and taking them to task on the rates and features they offer. Remember to take advantage of added bonuses like offset accounts, which can reduce the amount of interest you pay.

4. Become a property mogul

Well, why not? While a four bedroom family home in the suburbs might be out of reach, a small unit to rent out could be well within your reach. While you may still be renting, at least you’ll be gaining some capital appreciation on your investment. There are also two great things to remember:

  • 4.1 Leverage is a great thing. With a 10 per cent deposit, you can benefit from the growth of 100 per cent of a property’s value. This is why brick and mortar makes a solid foundation for a wealth-generating investment portfolio in the long term.
  • 4.2 As Australia grows at a rapid pace, units and apartments are becoming more desirable. At the moment they are appreciating in value quicker than houses in a lot of markets. In fact, looking at the figures from SQM Research, while houses in the capital cities appreciated by an average of 4.3 per cent over the last 12 months, units climber up 5.2 per cent over the same period.

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Learn more about home loans

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

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.

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

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 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.

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.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

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.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

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 does pre-approval' mean?

Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.

It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.

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.