It’s no secret that young people are finding it harder than ever to crack into the housing market, particularly in capital city hot spots where prices remain on the boiler.
According to research house CoreLogic, Sydney dwelling values increased 10.6% over the past 12 months, while Melbourne’s annual rate of capital gains stands at 9.1%. And with the median dwelling prices of Sydney and Melbourne at $800,000 and $600,000 respectively, coming up with the necessary deposit (that’s often around 20% of the purchase price) is no easy feat.
In fact, one-third of Australians spend more than five years saving for a deposit, while more than 11% of Australians have saved for 10 years or more to come up with the dough, according to a survey by finder.com.au. On average, it takes 3.7 years to save for a deposit.
So are there ways for aspiring first-home owners to fast track their way into the property market? After all, there’s only so much one can save by skimping on avocado on toast for breakfast.
Margaret Lomas of Destiny Financial Solutions shared three tips to help young people jump on the property ladder sooner rather than later. The first two options might suit those who don’t want to settle for a cheaper or less desirable property and location, and are lucky enough to have family members who can lend a helping hand to beat the deposit hurdle.
1. Check out ‘shared equity’ options some banks provide
“This is where the parents allow a small portion of their own home to be secured against the loan, but the loan is in the child’s name,” says Lomas.
Essentially, parents (or immediate family members) share some of their own home’s equity to provide extra security for the child’s loan amount.
“So what happens is that the loan comes out in the child’s name, and they (the bank) secure the property that your child’s bought, and a little bit of yours to create the deposit.”
In this scenario, the child’s loan-to-value ratio (LVR) will be reduced which can also reduce (and even avoid) the need for Lender’s Mortgage Insurance.
Parents won’t have ownership in the property, but are essentially a guarantor on the loan until the child’s property appreciates enough to support the loan on its own.
“Once the home that the child has bought reaches the point where it has grown enough, the bank releases the parents’ home, and the loan remains secured only by the home it purchased.”
2. Consider a joint venture
Parents and children can enter into a property purchase together. Both parties will take a ‘tenants in common’ arrangement, which allows both parties to take unequal stakes.
“The parents may supply say 20% of the value of the purchase price using their own home equity or cash, and in return, they get 20% of the property, and 20% of the gain when it gets sold in the future,” Lomas says.
“Once that property grows, the child can either buy you out by getting more of a loan, or you can sell it together, and each take your proceeds”.
There’s obviously shared responsibility in this type of arrangement, so it’s important to think carefully about the potential challenges you could face if both parties have a different outlook or goals for the property.
3. Become a landlord first
Yes, you might have to let go of the idea of purchasing your dream home with the white picket fence, but purchasing an investment property first has significant benefits.
For example, you might search for a more affordable property in a potential future hotspot where yields are attractive. Obviously, if the property is more affordable, the deposit required will be less. And while the tenant pays for the mortgage with their rental payments and the property appreciates, you can continue to save for your second deposit.
“The [home-owners] savings are then boosted by the property growth, which can either be realised in a sale, or leveraged against to act as a further deposit on your own home,” says Lomas.
“Useful to note that the first home owner grant is NOT lost by the home owner as long as they do not live in that investment.”
Exploring the fundamentals of an affordable area is important with this strategy: young buyers should ensure there are enough growth drivers to increase the value of the property over time. Click here to learn about how to spot promising signs.
So what are some areas with potential for future growth?
Melbourne’s South East, such as Carrum Downs and Cranbourne, suggests Lomas. Logan Shire in Brisbane, along with Moreton Bay Shire, could also experience the ‘ripple effect’ from neighbouring suburbs.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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