What’s keeping first home buyers out of the property market?

Buying a first home has never been an easy job, but according to new research, the reasons for why that’s the case have changed over time. 

The Housing Industry Association’s (HIA) latest Affordability Report revealed first home buyers now face a different kind of financial barrier. Gone are the days when unaffordable housing and the cost of mortgage repayments were the biggest culprits. Instead, they’re being set back by the process of actually securing a home loan, whether that’s saving up for a deposit or meeting the lender’s eligibility criteria. 

“Servicing a mortgage is not the constraint on home ownership that it has been in the past,” the HIA report found.

“The sticking point facing the current generation of aspiring home buyers is obtaining a mortgage in the first place - this relates to the lengthening of the time it takes to save up for a deposit, and then meeting the increasingly stringent requirements of lenders.” 

For one, rising house prices, especially in Sydney and Melbourne markets, means that it’s taking first home buyers much longer to save for a 20% deposit. 

And while it’s certainly possible to secure a home loan with a smaller deposit, this has been made harder by comprehensive credit reporting and lenders keeping a closer eye on borrowers’ household spending than ever before. Having a deposit below 20% also means you could be charged lenders mortgage insurance, which could add up to thousands of dollars. 

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The report added that many first home buyers are at a disadvantage when taking out a home loan, because they’re competing with other lower-risk customers who already own property.

“While first home buyers typically have income to meet loan serviceability requirements, they typically borrow a high proportion of the property value - and borrow closer to their capacity - which means they are considered a higher risk,” the report said. 

“The structural changes in the banking sector are discouraging banks from lending to those borrowing a high loan to valuation ratio (LVR), which includes most first home buyers.” 

Low deposit home loans: aye or nay? 

According to Mozo’s Property Expert, Steve Jovcevski, while it’s best to avoid LMI, a low deposit home loan isn’t an option that first home buyers should instantly dismiss, as it comes with both pros and cons. 

“While there are fewer home loans with a high LVR in the market these days and serviceability standards also tend to be stricter when you have to take out mortgage insurance, these loans could help you get into the property market a lot sooner and take advantage of rising house prices and capital growth,” he said. 

Another thing to keep in mind is that with LMI, a maximum loan size generally applies. So if you’re eyeing a house in Sydney worth over a million dollars, you won’t be able to take out a low deposit home loan for it, since mortgage insurance isn’t available for those pricier properties. The only ways around that constraint are either to have a 20% deposit or to get a guarantor. 

“On the one hand, [low deposit loans] could crimp your opportunities of what you can buy. You’ll probably be stuck buying an apartment if you’re living in Sydney, or if you’re in Melbourne, you would only be able to afford a house in the outer suburbs,” Jovcevski said. 

“But on the other hand, this LMI cap means that you could end up buying a cheaper property that qualifies for the government’s stamp duty exemption for first home buyers, which means you could potentially save tens of thousands of dollars on stamp duty.” 

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Or if you’re unhappy with your options in Sydney or Melbourne, Jovcevski recommended casting your net wider and looking beyond the two major cities. 

“Investment is another possible route for first home buyers, where they buy a cheaper property in a different state that could potentially go up more in value and still continue to rent where they want to live,” he said. 

“That way, they not only still get the benefit of living where they want to live, but they’ve also got a good and affordable investment under their belt, which is tax deductible as well, thanks to negative gearing.” 

According to Jovceski, Adelaide and Hobart are great places to start your search, as both cities have vacancy rates that are “crazy low” at the moment, sitting below 1%. In other words, there are too many people looking for a place to rent, but not enough vacant rental properties. 

Tips for dodging LMI

What if you don’t have a 20% deposit yet, but you still want to avoid paying LMI? In that case, you would need a guarantor: 

• Your parents: That’s right! You can avoid pesky LMI premiums by asking your parents or guardians to put their name next yours on a home loan application. Just bear in mind that because their home will be secured against yours, it’s crucial to stay on top of your repayments. 
• The government: Launched at the start of this year, the First Home Loan Deposit Scheme is a government-backed initiative that allows eligible first home buyers with as low as a 5% deposit to avoid LMI. But you’ll have to get in quick, as spots are filling up quickly! Or if you’ve missed out this time round, another 10,000 places will become available in July 2020, according to the National Housing Finance and Investment Corporation (NHFIC). 

Hoping to reach your home owning dreams sooner rather than later? Get started with these low deposit home loans below, or jump over to our home loans comparison table for even more options.