Four ways for millennials to get into the property market
The housing affordability crisis for first-home buyers in Sydney and Melbourne has been a hot issue for a while now. Gone are the days when you could pick up an old home in the outskirts of Sydney for a few hundred thousand dollars. Now that the city's overall median is around $1 million, how on earth are you going to afford a $200,000 deposit?
While I'd be the first to admit that buying your first property in 2016 is not without challenges, I don't believe it's impossible. If you're lucky enough to have a steady income, either from full-time work or casual work and good investments, you're looking at some of the cheapest interest rates ever seen in this country. You just have to find a way of cutting down the amount needed for a deposit.
1. Start looking at units
First, opting for a unit can save you money. Take the inner Sydney suburb of Marrickville, for example. According to CoreLogic's property value website, the median cost for a house is $1.2 million, while the median unit price is $640,000. It's almost 50% cheaper to buy a unit, so if you don't really need the space your best bet is to opt for something cheaper that you'll be able to pay off quicker. Your 20% deposit is also $112,000 cheaper - need I say more? Just be careful about where you buy. If there's a looming apartment glut, as in Melbourne city or south Sydney, you might end up losing money when it's time to sell.
2. Consider lenders mortgage insurance
If a 20% deposit is too steep for you, your next option could be to increase your loan to value ratio (LVR) by purchasing lenders mortgage insurance (LMI). LMI, which can allow you to borrow up to 95% of the property's price, protects the lender if you default on your loan. Your LMI premium can be paid upfront or you can capitalise it into the loan. LMI is even better if you're an investor, as it is tax deductible as a borrowing cost (you can't also claim the interest on it). The Genworth LMI calculator estimates a first-home buyer's premium for a $570,000 loan on a $600,000 property at $25,707 upfront (including GST, excluding stamp duty), so it doesn't come cheap.
But it does work out to be cheaper than your 20% deposit. Including your 5% deposit, that comes to a total of $55,707 needed upfront - $64,000 less than a 20% deposit. Of the 1036 fixed-rate home loans on RateCity's database, 846 of them allow extra repayments, where the maximum lump sum is capped at $30,000. LMI quotes vary from lender to lender, so shop around for different estimates. If your family is financially stable, perhaps you can take advantage of that.
3. Go co-borrower
There are a few different types of family loans that are available to people who need a leg-up with their deposit. If you add a co-borrower, you give that person equal share in the equity of the home. That means they have equal responsibility to repay the loan. If you buy a property with a sibling or trusted friend, the bank will take their income into account, so make sure it's someone reliable. Remember, you might end up being financially responsible if they eventually can't meet their loan repayments.
4. Ask a parent to go guarantor
Another way to increase your LVR is to jump into a loan with a parent or significant other acting as your guarantor. That way you can borrow up to 95% of your loan without paying LMI. If a guarantor signs onto your loan, they become responsible for your mortgage repayments should you default. The amount of the guarantee may be between 20% and 100% of the full value of the loan, so make sure your guarantor knows exactly what they're getting into.
Seek legal advice if you're considering going into a loan with another person.
With interest rates as low as 4%, it's a great time to think about buying your first property. Don't believe the hype that you can't get into the market. Just keep in mind the repercussions if the interest rate goes up.