Why low rates are making it harder than ever for first-time home buyers

It’s good to be positive!

With low interest rates at historic lows, it seems like now is the time for first-time home buyers to make the leap into the property market. Surely low interest rates would help lower the burden of taking on a first mortgage, right?

Think again. Times of low interest rates tend to make it more difficult for first-time home buyers to get their foot in the door. According to the latest data from the ABS, since January 2016, the number of first-time home buyers fell by 1.3 per cent, as at December 2016. Meaning first-home buyers make up approximately only 13 per cent of the market.

The impact of low rates actually has a double-whammy effect for younger Australians, and not in a good way.

One of the biggest challenges for those looking to enter the property market for the first time is building up a decent deposit. With average dwelling prices in Sydney close to $800,000 first-time home buyers are looking at approximately a $160,000 deposit plus costs.  That’s a hefty “pay-to-play” entry point.

It becomes even harder when you consider the low rate environment we currently operate in. Low rates mean low interest earned on savings.

Seriously, it costs THAT much?! 

On the flip side, low rates create an attractive buying market. Property prices balloon as other buyers are able to take on more debt. Existing home owners are a clear winner, with lower repayments and a big housing asset they can borrow against or sell. It’s no surprise that we have seen a leap in investors and up-graders at the expense of the first-time home buyer.

While it may seem like the great Australian dream has become unattainable for aspiring first-time home owners, not all hope is lost thanks to an increasing trend termed ‘the bank of Mum and Dad’.

Recent research published by advisory firm, Digital Finance Analytics, found over 50% of all first-time buyers are getting assistance from parents to purchase property, up from about one in 20 in 2010.

But for those of us whose parents may not be able to offer assistance in the form of cash, never fear. A family pledge loan could be the answer you’re looking for.

What is a family pledge loan?
A family pledge loan allows first-time home buyers to make up for the fact that they don’t have a sufficient deposit saved by using the equity in a family member’s property as security on their loan. It is generally restricted to immediate family members such as parents, grandparents or siblings.

What are the benefits?
The benefits of a family pledge loan include:

  • No savings required. A family pledge provides access to finance immediately, meaning first-time home buyers can enter into the market faster, without having to wait years to build up their contribution.
  • No lender’s mortgage insurance (LMI). Without a 20% deposit, most borrowers are required to purchase LMI. Having a family pledge guarantee removes the need for LMI and the hefty premiums that come with it, which can add thousands of dollars to a loan.
  • Increased borrowing power. A family pledge loan increases borrowing power. With a guarantee, 105% of the purchase property’s value can be borrowed to cover set-up costs such as stamp duty or legal fees.
  • Limit the guarantee. Family pledge loans now require the guarantee to be limited to a specific amount. This allows the guarantor’s security to be released once the LVR on the borrower’s security falls below 80%.
  • Using other assets. Many family pledge loans require a property to be used as collateral for the loan. However, some will let you use other assets so don’t forget to ask your lender.

For many, getting a helping hand from family members is the only way to remove the roadblocks that stand in the way of owning their own home. With low interest rates possibly continuing for some time, we predict the family pledge loan to become an ever popular choice.

Paul Thomas is CEO of Gateway Credit Union – one of Australia’s leading customer-owned banking institutions for the past 60 years’. It offers award-winning personal banking products including home loans.

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