COVID-19 disrupts home ownership plans for first home buyers

COVID-19 disrupts home ownership plans for first home buyers

COVID-19 has thwarted the property purchase plans of many first home buyers, a new survey found.

More than two thirds of first home buyers believe the pandemic has forced them to push back or give up buying a home, according to a poll of 700 from Gateway Bank. The survey was conducted in late May.

Just over half of first home buyers have delayed their home ownership plans, while another 16 per cent have put their plans on ice “indefinitely”.

First home buyers spend their home deposit savings

The research also found that half of Australian first home buyers have resorted to raiding their property deposit savings – money they may have spent years building up – to get by during COVID-19. One in six have nearly wiped out their deposit savings in this period.

The most common reason for first home buyers to dip into their deposit savings was to pay for everyday expenses, with 45 per cent saying this was what they used their funds for. 

More than a third indicated they reallocating their deposit savings as their emergency fund, while 17 per cent accessed their funds to support a financially distressed family member. 

Others used their deposit savings for:

  • Stock market investments – 11 per cent
  • Term deposit/high interest account – 11 per cent
  • Travel – 10 per cent
  • Buying/upgrading a motor vehicle – 10 per cent
  • Upgrading rental accommodation – 6 per cent.

Nearly a quarter of first home buyers say they don’t intend to move their savings.

For the first home buyers who were forced to chip away at their deposit funds, it may take them longer to build up savings before their deposit is large enough to enter the housing market.

Almost 60 per cent estimate that they may need to save for an additional one to three years, while a quarter reckon they won’t be ready to put down a deposit for another three years.

Lexi Airey, Gateway Bank’s chief executive officer, said while many were accessing their home deposit savings during the pandemic, getting a foot on the property ladder is not completely out of reach.

“As more people are being forced to spend their deposit savings on basic living expenses, the prospect of buying a property is now even more elusive,” she said.

“However, the dream of home ownership remains alive for the vast majority of Australians, even if it is going to take longer to realise.”

One in five don’t know about government help for first home buyers

While savings timelines have been disrupted, the government has introduced various measures to help first home buyers get their foot on the property ladder. However, many were overlooking these schemes, the Gateway poll found.

More than one in five of those surveyed were unaware of any government financial assistance for first home buyers. 

Meanwhile, 44 per cent had not heard of the First Home Owner Grants, which is a one-off state-funded grant to eligible first home buyers.

As few as a third knew about the First Home Loan Deposit Scheme, where first home buyers with a deposit of as little as 5 per cent may take out a mortgage without paying lender’s mortgage insurance (LMI). 

About a quarter were aware of stamp duty concessions for first home buyers and the First Home Super Saver Scheme, which allows those who haven’t bought a property to save for a deposit within their superannuation fund.

Ms Airey said while some first home buyers are taking advantage of government financial assistance schemes, many were unaware of the help available to them.

“These schemes and other options such as LMI or a family guarantee are designed to help first home buyers purchase their property sooner,” she said.

“Awareness of these measures is generally quite low, and those looking to enter the property market for the first time could be missing out on an opportunity to put their pre-COVID home ownership plans back on track.”

Tips to help you save for a property deposit

1. Get on top of your debts

Debt can be a real financial burden, particularly when trying to come up with a sizeable deposit. While getting out debt can be tough, it’s not impossible. Consider focusing on your debt with the highest interest rate, as this is likely to be your most expensive debt. This may be your credit card debt, given that purchase rates can be as high as about 25 per cent on some cards. If you can smash a high-interest debt, you may well be on your way to a debt-free life. Another option is to consolidate your debts with a personal loan. This can help reduce the fees and interest you pay on multiple loans by rolling them into one personal loan, which some may also find to be more manageable. 

2. Consider government help

If you’re seriously looking to buy a property but don’t know about the government first home buyer’s assistance schemes available, doing some research into this won’t hurt. Getting your foot on the property ladder is hard enough as it is without a raging pandemic, so it makes sense for you to take advantage of whatever help is available for you. Government assistance measures may come in the form of cash grants, mortgage assistance or stamp duty concessions and exemptions. Make sure you read up on the assistance available in your state and each scheme’s criteria to see if you’re eligible. 

3. Open a term deposit account

While interest rates are on the decline, stashing your money away in a term deposit could be an option for those not wanting to risk their life savings on the stock market. Term deposits generally provide a fixed return on a set amount of money over a certain period. On the upside, you’ll know exactly how much you’ll earn over the term deposit period. However, it’s important to note that if you get in a situation where you need to access your term deposit funds, you’re likely to be charged a break fee from the bank. You may also miss out on some interest if you do take out your funds early. Make sure you weigh up the pros and cons of a term deposit before you sign up for one.

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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.

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 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 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 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.

How do I save for a mortgage when renting?

Saving for a deposit to secure a mortgage when renting is challenging but it can be done with time and patience. If you’re on a single income it can be even more difficult but this shouldn’t discourage you from buying your own home.

To save for a deposit, plan out a monthly budget and put it in a prominent position so it acts as a daily reminder of your ultimate goal. In your budget, set aside an amount of money each week to go into a savings account so you can start building up the ‘0’s’ in your account.  There are a range of online savings accounts that offer reasonable interest, although some will only off you high rates for the first few months so be wary of this.

If you aren’t able to save a large deposit, you can consider ways of entering the market that require small or no deposits. This can include getting a parent to act as guarantor for your home loan or entering the market with an interest only loan.

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.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.

How can I get a home loan with no deposit?

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.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.