The dream of my generation was to pay off a mortgage, and the dream of today’s young families is to get one. This is a one liner I read on a web site and it is almost too true to be funny. Especially where our state governments have been fiddling with the stamp duty concessions and first home buyers schemes at a time when rental affordability is at an all time low, many young families simply can’t find a way to save the deposit required.
In NSW, Qld and in Victoria (subject to legislation passing) the First Home Buyers Grants will only apply to people purchasing a newly constructed home. This is further compounded for NSW where the stamp duty concessions for first home buyers again only receive concessions on newly constructed homes. Some commentators would argue that Australia does not have a housing shortage – but it does have an affordable housing shortage. Funnelling all first home buyers into new constructions is simply pushing up the price on this end of the market, for the benefit of developers. Meanwhile these governments have widely adopted a ‘user pays’ attitude to housing development which has further increased the end cost of housing – in the specific market where it is most needed.
Prior to the GFC lenders offered 100 percent home loans where a first home buyer being fully exempt from stamp duty could use their first home buyers grant to cover establishment costs and effectively borrow the full amount of the property purchase price. This then became a problem with the Federal Stimulus tactics of the GFC offering double home grant and encouraging so many inexperienced young buyers to rush in to get the additional grant. Of course the reality was the rush forced prices up and then when the grants were removed prices adjusted down and the young borrowers are in a position of negative equity ie: they owe more than their homes are worth.
Today the mortgage insurers (LMI) have no appetite for risk and so much stricter requirement on genuine savings are imposed – typically 5 percent of the purchase price saved over a minimum 3 month period with an explanation required on all lump sum payments. For young buyers lucky enough to have wealthy family who can gift them funds then 10 percent deposit will generally mean that no questions asked on genuine savings. There are a few lenders who will accept 12 months timely rent repayments through an agent in lieu of savings however the borrower still needs 5 percent deposit from some source.
Probably the best outcome for struggling young families is a parent being a guarantor for 10 or 20 percent of the purchase price ie: a limited guarantee. This allows your kids to effectively borrow all of the purchase price and even the stamp duty if applicable. Yes there is some risk and parents should seek independent advice but it is an option that can work well.