Affordability issue hasn’t gone away
ONE of the biggest challenges first home buyers face is high property prices. The market may have dipped in some areas but with a median dwelling value of $455,000 across our state and territory capitals, the affordability issue certainly hasn't gone away.
I'm a big fan of home ownership. Paying off a home loan is a form of forced saving, and long term rising property values mean your home can generate considerable capital growth over time. When my wife and I for instance purchased our first home on the lower north shore of Sydney in 1983, we paid the then reasonable sum of $90,000. These days that same house would be worth over $1 million.
For today's first home buyers it can be a lot tougher to enter the market than it was back in the 1980s, and it usually means taking out a substantial loan. Ten years ago the average mortgage for first home buyers was around $151,000. In 2012, the average is closer to $290,000.
In a further blow to first home buyers, some state governments have axed the first home owner grant on existing homes. That's made things tougher for anyone planning to buy a cheap and cheerful fix-up property - once the preferred option for many younger buyers.
With first home buyers accounting for around one in five new mortgages, a number of financial institutions have taken steps to cater for this section of the market. Recognising this, research group Canstar recently announced the winners of its First Home Buyer Award, and Westpac came up trumps.
A number of features got Westpac across the line including the bank's 3 year-fixed rate loan, which allows up to $30,000 in extra repayments each year as well as free redraw.
A number of non-banks received gongs too. Hume Building Society was the winner in Victoria, and Community CPS took out the award in South Australia.
To be eligible for one of these awards, financial institutions had to provide face-to-face staff in the area they operate and offer a full range of banking products. This is important because many of the cheapest home loans are available through lenders that only operate online, and some sell nothing but mortgages. This reinforces to need to shop around for a first home loan.
It's worth stressing that while it can be a real challenge for first home buyers to get a foothold on the property ladder, I believe it's worth trying for, so long as you do it properly. Just make sure you buy at the right price, that you buy in an area with reasonable prospects for longer term capital growth, and that you can afford to repay the loan, even if interest rates rise, which you can be sure they will at some point.
If your finances let you get off the rental merry-go-round and jump into the home market, chances are you'll be better off over the long term for doing it. Yes, at times it can feel like the mortgage is killing you but the rewards are worth the effort.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.