Saturday, March 21, 2009

First home buyers told to keep spare cash

First home buyers told to keep spare cash | Property |
GOVERNMENT grants and low interest rates are encouraging thousands of first home buyers to enter the property market, but experts warn impulsive decisions could come back to bite borrowers in the long term.

New figures from the Australian Bureau of Statistics show mortgage sales to first home buyers are at record highs as the June 30 deadline to access the Federal Government's boosted contribution approaches, with no guarantee of an extension despite entreaties from the property sector.

Mortgage sales to first home buyers rose to 26.5 per cent of all mortgages arranged in January, the highest proportion since the series commenced in 1991. This was up from 25.7 per cent in December and 23.6 per cent in November.

The rise is due partly to the Government's sweetened incentive -- a $14,000 grant for existing properties and $21,000 for newly constructed homes -- and partly to improved housing affordability because of lower interest rates and falling house prices.

Lisa Montgomery, head of consumer advocacy at mortgage lender Resi, says there is a real sense of urgency among first home buyers to secure a property before the grants expire, which can lead to risky, spur-of-the-moment purchases.
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Canstar Cannex senior financial analyst Harry Senlitonga says falling property prices should be of particular concern to borrowers who have not saved a substantial deposit.

"A characteristic of first home buyers is they have a small or no deposit at all (and) with the small equity in the property to start with, there is the likelihood that they might be in a negative equity position if the property price falls further," he says.

"The risk is, even after you sell the property you have to come up with your own money to pay the debt."

The Government's $21,000 grant for a newly built home is 7 per cent of a $300,000 loan, which Senlitonga says may not provide alarge enough buffer in a falling property market.

The Real Estate Institute of Australia/Mortgage Choice Market Facts Report revealed property prices decreased by an average of 6.2 per cent between December 2007 and December 2008.

Perth property prices were the worst hit, plunging by an average of 12.2 per cent, followed by Melbourne with a drop of 9.8 per cent and Canberra with a fall of 8.9 per cent. Sydney house prices fell 3.9 per cent.

According to mortgage broker Australian Finance Group, loan to value ratios have risen steadily in the past 12 months and hit a new high of 72.5 per cent in January, up from 62.7 per cent in January 2008, as property prices fall and people incorporate expensive personal debt, such as credit card debt, into their loan.

Montgomery warns new borrowers that the higher their LVR, the more mortgage insurance they will be forced to pay, often adding thousands of dollars to the loan. Mortgage insurance protects the lender in the instance the borrower defaults on the loan, and is required on new mortgages with an LVR above 80 per cent.

A 20 per cent deposit therefore would allow borrowers to avoid having to pay the additional cost; but, for first home owners who want to purchase a property sooner, Montgomery says saving at least a 10 per cent deposit would be a prudent strategy. She also advises first home buyers to consider whether they can afford the loan repayments when interest rates inevitably rise.

Since September, the Reserve Bank has lowered the official cash rate by 4 percentage points to a 45-year low of 3.25 per cent, making the average mortgage holder with a 25-year loan of $300,000, $744 better off a month.

"(First home buyers) need to be factoring in whether they can repay that current loan at 2 to 3 per cent higher than what it is now. I would even go as far as saying 3 to 4 per cent (higher)," Montgomery says. While she says it is unlikely rates will climb to the 18 per cent highs of the 1990s, borrowers should be prepared for a return to the 5 to 9 per cent level.

"Rates are cyclical and we are coming to the end of that cycle, that downward trend, so it's best to prepare for what has most recently occurred," Montgomery says.

However, this raises the question whether now would be a good time to apply for a fixed rate loan.

According to Mortgage Choice, variable rate loans now account for 92per cent of all home loan approvals, a level not seen since the broker started recording the data in January 2003.

Fixed rate loans represent only 2.5 per cent of all home loan approvals. In November 2007, they peaked at 38 per cent.

Mortgage Choice senior corporate affairs manager Kristy Sheppard says the reduction in fixed rate loans suggests Australians are confident that interest rates will remain at historically low levels for the short term at least.

The experts say first home buyers should also consider rectifying any gaps in their insurance coverage, such as income protection or life insurance, and testing a budget before taking out the loan.

"A lot of the time when you buy a property, there are so many other things you need to consider," Montgomery says.

"Obviously house and contents insurance you need to obtain, but also you should be looking for protection for life and disability."

Tupicoffs financial adviser Neil Kendall says job security and the ability to repay the loan in the case of redundancy are also important considerations, especially as unemployment levels are on the rise.

"I am enormously concerned that (encouraging) first home buyers has a big sting in the tail because they are the people most likely to be losing their jobs, least able to afford it and often stretching themselves because of the deadline for the bonus first home owners grant," he says.

He urges first home buyers not to rush in without the safety net of a cash reserve.

"If someone was talking to me about buying one of these houses who was a first home buyer, I would be saying to them, 'Have you got six months worth of living expenses and mortgage repayments in reserve?'"

Buyer Beware

* A 10 per cent deposit helps protect against negative equity.
* A 20 per cent deposit will avoid mortgage insurance, which protects only the lender.
* Determine whether you can afford a 3 per cent to 4 per cent rise in interest rates.
* A fixed rate loan may beworthwhile.
* Six months worth of loan repayments in reserve is a good idea in case of unemployment.

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