Money focus: How can I buy my first home?

Each week we ask a question to help you focus on an area of your finances that might need a closer look. This week: How can I buy my first home?

It’s officially never been harder to get into the property market. Figures released by the Australian Institute for Progress show that it’s almost impossible to save a deposit when record low interest rates make the return on savings minimal at the same time they’ve pushed home values through the roof.

“Wages have to rise, or house prices fall, for affordability to be restored,” says Executive Director Graham Young. “Prices have the capacity to fall faster than wages increase, so it is more likely that house prices will fall as new home buyers cannot afford to buy into the market and withdraw.”

Adding to the strain is the fact that rent prices increased by an average of 7.4 per cent last year. This was the biggest yearly increase since 2009.

So, no first home buyers aren’t imagining things.

3 things to know about being a first home buyer

Before we leap to using phrases like “impossible to get into the housing market” and “I’ll never own my own home”, let’s take a step back.

There are three things to keep in mind:

Buying your own home has always been the biggest stretch most people ever take.
There are plenty of other ways to invest your money, if that’s what you’re buying property for.
There are options available if buying is more about security, peace of mind and home.

Alternatives to buying your first home

If #2 resonates with you, read these:

Options if you still want to get into the property market

If #3 resonates with you, keep reading. It is still possible to buy your first home and there’s help out there to make it happen. Here’s your launch pad to getting your foot in the door.

1. Save, save, save and save some more

Of course, you’re still going to need grit and determination to save, save, save. The bottom line of any first home purchase is having a decent deposit to put towards a mortgage.

Interest rates on savings accounts suck right now, so they’re not going to give you a leg-up. But you can still get the deposit you need together by tucking it away yourself. Here are some resources to help you save more or earn more or, hopefully, both:

Save more

Earn more

2. Take advantage of government support

The federal government and each state offer support and waivers to first home buyers. Research what’s available to you and check all eligibility criteria before applying. Here’s a list to get you started:

Federal

The First Home Super Saver Scheme is a tax-effective way to save money for your home deposit. You save by salary-sacrificing into your super and then use those voluntary contributions towards your deposit.

It allows you to save up to $30K in total, or $15K over two financial years
You need to withdraw the funds before you sign a contract for a home
Remember, you can’t remove your employer or spousal contributions, just your own voluntary contributions
You can only use the funds towards a deposit for a house you plan to live in (ie. not an investment property)

ACT

The ACT government is building units, apartments and townhouses as part of their Affordable Home Purchase scheme. The scheme aims to help people who most need affordable housing access it.

Stamp Duty Concession

NSW

VIC

SA

First Home Owner Grant

TAS

Under Tassie’s HomeShare scheme, you share the cost of buying your home with the government via the Director of Housing. You own at least 70 per cent and the Director owns the other 30 per cent – capped at $100K for house and land packages.

QLD

WA

NT

3. Find a guarantor

A guarantor is someone who basically says “if this person can’t pay their mortgage, I’ll pay it for them”. As you can imagine, it’s a very big deal to go guarantor for someone and something that should never be taken lightly.

The most common structure for a guarantorship is your guarantor putting up their own assets (usually their home) as collateral to secure your mortgage.

As you pay down your loan (or if it’s value increases), you can apply to have the guarantor removed from your mortgage.

If you’re considering asking someone (maybe your parents) to go guarantor, please seek legal advice on the arrangement. It’s a truly risky business and your relationship will thank you for the structure.

4. Buying property with friends or family

Research from CommBank revealed that a quarter of Aussies have considered buying into a property share.

When asked what was driving the property share trend, over two-thirds said affordability was the main reason. This was followed by buying a bigger/better property and spreading the financial risk if anything went wrong.

Property share can help make buying your first home attainable. It usually involves:

pooling your money with others to put a deposit down on a home
combining your borrowing power to borrow the rest from a financial organisation
paying off the mortgage on your home instead of paying rent (for owner occupiers), or earning a stream of rental income (for investors)

But is it a good idea? Find out here: Property share: Is buying property with family and friends a good idea?

5. Rent to buy

If renting your home to eventually own it sounds too good to be true, that’s because it probably is.

Rent-to-Buy schemes (RTB, aka rent-to-own) give aspiring tenants the option to purchase a property in the future (usually three to five years) at an agreed price. You’ll pay your standard rent plus an additional ‘option to buy’ fee. You’ll still need to apply for a home loan if you decide to buy the property at the end of the agreement period.

There are risks involved, including being out of pocket with no claim on the property if you default at any time on your rent payments. Or if you can’t get financing when it’s time to buy the home.

In a 2016 report by the Consumer Action Law Centre, the consumer advocacy organisation said it had not identified any “successful cases” of a RTB deal. It warned that RTB schemes are “extremely financially risky and the legal protections for buyers is grossly inadequate”.

In addition, real estate comparison service OpenAgent found that rent charged on RTB properties can be as much as 50-100 per cent higher than the average rent for an area. And that’s before you add the ‘option fee’ on top of the rent.

In a nutshell, not a good way to buy your first home.

6. The Bank of Mum and Dad

This option might only be available to a privileged few, but if you’re among them, do consider it.

There are a couple factors to consider to make it work:

It’s not just a matter of slapping down your parents’ cash as a deposit. Your lender will want to see evidence of genuine savings in order to lend you money. So no matter how much your folks are able to pony up, to get your mortgage, you’ll still need to go back to point 1 above and save, save, save.
Agree upfront with your parents whether this is a gift (‘early inheritance’) or a loan. If it’s the former, lucky you. If it’s the latter, get the legals sorted and a solid plan in place for how and by when you’re going to pay the loan back. There will be tax considerations for your parents in either case.

7. Rent-vesting

If you really can’t afford to buy in the area you have your heart set on living in, you can always put your deposit towards an investment property somewhere else. This is what’s called ‘rent-vesting’. Live where you want, buy where you can.

Of course, rent-vesting means you give up the ‘all my own home’ feels. There’s still no putting pictures up wherever you please or painting the bathroom neon green on a whim (note to self, resist that whim).

What rent-vesting will get you is a first step onto the property ladder combined with some very pretty tax deductions. Find out more here:

8. Put your money somewhere else

The best thing about buying property is that it forces you to invest like clockwork into a (hopefully) appreciating asset. But you don’t have to buy property to get the same benefits. Instead, you can rent for life and put your money into shares, other assets or a business. Pick an investment, get started and consistently add to it. Compound interest should take care of the rest.

The only hiccough to doing that is how diabolical the Australian rental market is. Short leases, high rents, crappy landlords, dumpy homes – there’s a reason everyone wants out. If that’s you, keep plugging away at home ownership. One way or another, you’ll get there if you stay consistent and patient.

Find the rest of our Money Focus series here.

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Money focus: How can I buy my first home?