Media is full of reports speculating whether it is the right time for first time buyers to enter the market or not. In this article we discuss with Scott Le Quesne, Co-Franchisee of Aussie Parramatta and Rouse Hill what you need to know in 2019 as a first time buyer.
- Is now a good time for first time buyers to buy?
Housing has become more affordable as a result of prices softening over the last 12 to 18 months. Borrowers can create a realistic savings plan without fear of the market moving too quickly. “The urgency has gone out the market. First time buyers are not competing so hard with all the investors in the market. I think this is really in first time buyers’ favour ”, says Scott Le Quesne.
2. The biggest question is: as a first time buyer how much can I borrow?
As a first time buyers, if you are going to buy as an owner occupier and make principle and interest repayments, it’s never been cheaper to borrow money. Rates are as low as they have ever been making the payments more affordable.
happy first time buyers
There are two borrowing capacities first time buyers need to consider :
– Firstly, how much is a lender willing to lend me? This varies from person to person based on income and expenses. One big change that has occurred is that lenders are looking at your living expenses much close. Be sure to rain in your discretionary spending well before you are wanting to borrow.
– Secondly, what am I willing to repay, that is, what level of debt am I comfortable with? What repayment is still comfortable for me as a first time buyer if I allow for rates to rise in the future?
As first time buyers, you need to be realistic of how much debt you are comfortable with. Have an open and frank discussion with your mortgage broker. A good mortgage broker will be able to provide you with realistic goals and possibilities suitable for your individual set of circumstances.
3. Options to get first time buyers into the market
– Traditional Saving Plan
Is this a viable option for me or will I be retiring by the time I save enough?
This is a no brainer – if you put aside X amount of money on a regular basis, you will end up with x amount of money by your chosen time frame. But with rising cost of living and life throwing unexpected curve balls, many first time buyers struggle to save for a deposit.
Roughly speaking for an $800,000 property you need $200,000 to cover a 20% deposit plus cost (stamp duty, solicitor’s fees etc). Having a 20% deposit avoids Lenders Mortgage Insurance (LMI) which makes it the ideal deposit. However if you are looking to get in sooner there are options which only require a 5% deposit. The down side is that they will incur a hefty LMI premium.
As mortgage brokers we sit down with our clients and help them get a clear idea of what they need to have and what suits their situation best. We put a plan in place to achieve their savings goal as first time buyers or look at other options.
– Parental Guarantees – what are they?
As mortgage brokers in our business we get this challenge presented to us on daily basis: “I have a capacity to repay the loan as I am already paying rent and have a good income but I just can’t get the deposit together.”
There is an option here for first time buyers called Parental Guarantees. “My experience is parents are really keen to help. They have a clear understanding of how difficult it is for first time buyers”, says Scott Le Quesne.
How do Parental Guarantees work for first time buyers?
Parents can generally help in two ways. Firstly, parents can give their children cash for a deposit. However few parents are in the position in their own lives to do this.
More parents are in the second position of having equity of their own home or investment property. This equity position gives first time buyers an opportunity for a Parental Guarantee loan.
A Parental Guarantee allows the buyers to borrow 100% of the purchase price plus the costs negating the need for a deposit. The first time buyers are required to show they can afford the full loan on their own.
Parents income is not included for servicing purposes. The parents’ home is simply used as an additional security providing a limited guarantee. This will bring the loan to 80% which avoids Lenders Mortgage Insurance.
For example, if the first home buyer is buying for $500,000 they could borrow up to approximately $525,000 to cover all the costs.
How should Parental Guarantees be structured for First time Buyers?
Some lenders will just do one loan of $525,000 which they require to be 80% of the security taken. That would be $656,250 of which $500,000 is the new property being purchase and the remaining $156,250 would be the Limited Guarantee sitting against the parents’ home.
The second way lenders structure these loans is to split the loans by having 80% of the purchase being one loan $400,000 over the $500,000 purchase. The remaining funds of $125,000 would be a second loan secured by both the new property and mum and dad’s place.
This option is becoming more popular for first time buyers and parents.
4. Living expenses – are they really that important?
Simply put, yes they are. Banks are taking a much closer look at your living expenses as a result of recent changes in banking (think APRA requirements and Royal Banking Commission). Banks are bearing a greater burden in responsible lending and therefore have stricter lending criteria. This has a huge impact on first time buyers lending.
Your spending habits will significantly impact your ability to borrow. Banks consider all your spending when assessing your loan application so pay attention to your discretionary spending.
So what’s the verdict?
First time buyers still have borrowing options. It helps to find an experienced mortgage broker who can evaluate your individual set of circumstances. You can then set a realistic goal towards buying your first home. Simply click here to work out your goals and let us get you there sooner.