When buying that first home gets tough, the tough get clever. Young people are coming up with smart strategies for getting into the market.
As house prices in many parts of Australia continue to rise, underemployment persists and the spectre of rising interest rates starts to bite, it can seem a particularly grim time to be a homebuyer.
Some first homebuyers are sticking to the traditional method of leaving school or university, getting a job and working hard to save a deposit.
But Mercer financial adviser Meg Rennie says, even for the most frugal, it’s difficult to save the $100,000 that is often needed for a deposit and to cover costs. This is especially so if you’re a young homebuyer doing it on your own.
For those determined to get into the market, there are alternative strategies for home ownership. However, it’s critical to assess each strategy in detail to avoid any unexpected consequences down the track.
Invest now and buy your own home later
Rising house prices are a big barrier for aspiring buyers: according to property data firm CoreLogic capital-city dwelling prices have risen by nearly 10.9 per cent over the 2016 calendar year. But priorities are also an issue.
For those who don’t want to curb their lifestyle and move to an area further from the city where they could afford to buy, “rentvesting” – buying an investment property first and your own home later – is a great strategy.
It’s becoming more popular, with a Mortgage Choice survey finding the number of rentvestors grew by about 10 per cent between 2014 and 2016.
“It works particularly well for younger people because it gives them the freedom to move for work, while having your own home can tie you down,” says Rennie. “There are also great tax incentives for rentvestors, with all the costs tax deductible due to negative gearing.”
The one obvious downside is that the place where you live is still subject to the whims of the landlord, meaning you could be asked to move out at any time.
Many aspiring first homebuyers are pairing up with others to increase their borrowing power and share the ongoing financial burden. This is nothing new, says property lecturer and author Peter Koulizos, but rather than pairing with a romantic partner, people are increasingly pairing up with family or friends instead. It’s also possible to form a joint venture with builders or developers or invest in a syndicate.
“Having 50 per cent of something is better than 100 per cent of nothing,” Koulizos says. “Partnering up is best viewed as a medium-term proposition, where the aim is to build some equity to use later to buy on your own.”
Pairing up usually starts with shared goals, and it can end that way, but more often as people get older their circumstances change and one person, or both, will want to sell. This is why it’s essential to have a formal agreement drawn up by a lawyer at the beginning spelling out all the conditions.
Get a leg up from mum and dad
Another option for would-be first homebuyers is to seek help from their parents by borrowing money, getting an early inheritance or living in the family home for longer to cut costs and save a deposit. Koulizos says many mums and dads are going guarantor through family pledge loans, whereby they offer equity in their home as security for their offspring’s home loan.
But the issue with this, he says, is that it restricts what older generations can do with their property, which impacts their own long-term plans.
While many parents are helping their children to achieve the “great Australian dream” – even if it means they have to work longer or tone down their lifestyle – Rennie says there’s many who just aren’t able to help.
“A lot of people want to leave money to their kids, but in terms of house deposits these days I’m finding people still have a mortgage themselves so they have no more money to offer,” she says. “They’ve also spent a lot of money on their kids’ education with private school fees so they’re trying to do what they can to get more money in superannuation.”
It’s a position borne out by a recent report from the Australian Institute of Superannuation Trustees, which found that as home ownership levels decline, many superannuation nest eggs are being chewed up by mortgage or rental payments.
According to the report: “Not only do the emerging trends in Australia’s housing market spell trouble for those who will be entering retirement over the next three or four decades, they also spell trouble for Australia’s public finances, and for the governments who will preside over them.”
No matter which strategy you choose, be sure to do your homework before jumping into the market. Use rent vs buy calculators to get a general idea then talk to people you trust for advice.
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