Michelle Hutchison, Money Expert at finder.com.au
The Reserve Bank of Australia lowered the official cash rate to an historic low of 2 percent this month, but that won’t necessarily make it easier for first home buyers to enter the property market.
In fact, of the 34 leading economists and experts surveyed in a recent finder.com.au Reserve Bank Survey, one in three said they expected fewer first home buyers to enter the market this year.
The proportion of home buyers purchasing their first home is already low. In February 2015, when the Reserve Bank last dropped the cash rate, fewer than 14 percent of all home loans approved for the month were taken out by first home buyers.
While low interest rates can make owning a house more affordable due to the repayments being lower, more often than not the effect of encouraging more buyers into the market can lead to a rise in property prices.
When you’re buying your first home, even a small rise in prices can seem daunting but stay focused on the big picture: the value of your property will continue to rise over time and leave you financially better off in the long term.
Whether you’re buying your first home or your seventh, the secret to buying is to do your homework and become ‘market minded’. Start by researching prices and trends in the area of your choice to be able to calculate what you can afford and to make an informed decision on the true value of a property once you begin your search.
If your budget won’t allow you to buy in your preferred area, look for a suitable alternative with similar amenities and lifestyle. Also consider a trade-off that would allow you to buy a cheaper home in the area of your choice – for example, buying on a main road or buying a run-down property you can renovate at a later stage.
When it comes to the down payment, starting with a reasonably sized deposit will stand you in good stead. Not only will your repayments be lower because you are borrowing less, but if you save a 20 percent deposit you will avoid paying lenders’ mortgage insurance. LMI protects the lender – not you – in the event that you have to default on your mortgage. The cost of it is added to your total loan amount.
You should also factor in the other associated costs of buying a property, such as legal costs, inspection fees, loan application fees and stamp duty. As stamp duty is a state levy, the amount you need to pay will vary from state to state or territory, using different rules and calculations.
First home buyers wanting to be ‘market ready’, however, must ensure they don’t fall into the trap of overextending themselves and borrowing too much while interest rates are low.
With the majority of experts who took part in the finder.com.au Reserve Bank Survey expecting the cash rate to begin rising next year, a good tip is to calculate whether you can still afford the repayments if interest rates rise by two percentage points. If you pass this test, you’re ready to jump in to the property market.
Michelle is the Money Expert for finder.com.au, one of the biggest online comparison networks in Australia.