Why HomeStart is not the way to buy your first home
For many first home buyers in Australia, buying your first home can be a real struggle, but it is not impossible. With rapidly rising property prices in Sydney and Melbourne, entering the property market today is becoming increasingly harder to do with larger deposits required to secure your home whilst facing an increase in competition.
South Australia has had a scheme in place for almost thirty years to help those on a low to moderate income, including those on casual wages as well as those on Centrelink benefits to purchase a property. Its HomeStart Finance agency, which acts as a lender, allows prospective first home buyers to get a foothold in the property market who are otherwise unable to secure traditional sources of finance from a bank or lender.
The advantage of using this agency to purchase a property is that HomeStart does not require large deposits like the banks, whilst it also does not charge mortgage lender’s insurance. However, the interest rate on the loan can be variable and is typically 1 per cent higher than the banks. In spite of this, repayments are structured in a way to ensure that household cashflow is not severely affected.
Over its lifetime, HomeStart has helped over 66,000 households within South Australia to purchase a home, which equates to approximately one in eight first home buyers. However, this is restricted to buyers and purchases in South Australia only.
Western Australia also has a similar scheme in place called KeyStart, and it is suggested that a similar scheme should be rolled out nationwide, but there are many disadvantages in doing so. In our opinion, this scheme is not the way to go about buying your first home and in fact can be quite damaging.
Why should a HomeStart scheme not be rolled out nationally? There are many reasons as to why a similar HomeStart scheme should not be rolled out across Australia. These reasons include:
1) Strict lending criteria required
Banks and lenders have criteria in place which stipulates who they can lend to and who they cannot. This protects themselves as well as the buyer. By expanding home ownership to everyone, including those on very low incomes then the level of risk will greatly increase due to people getting into situations where they are unable to afford mortgage repayments and get into financial difficulty. This will have an adverse affect on the local and national property market.
2) Risk of housing market collapse
If everyone and anyone can get approved for a home loan then this might lead to the collapse of the housing market as there is a higher amount of risk and much more debt in the economy.
3) More housing supply required
One of the reasons as to why property prices are so high and unaffordable in the first place, particularly in Sydney and Melbourne is because there is a lack of supply, combined with a high demand which is driving prices up. To rectify the affordability issue, more supply is needed, especially as the population across Australia is continuing to grow at a rapid pace.
How should first home buyers enter the market? So if a scheme like HomeStart is not the way to buy a property, how can those on low and moderate incomes become home owners and purchase a property?
1) Know what you can afford
The first thing you need to find out is how much money you have to spend on a property. The best way to do this is to see a Mortgage Broker and get them to calculate this for you. An online calculator can help, but is not always correct.
2) Create a savings plan and budget accordingly
Once you know how much money you can borrow, you then need to create a savings plan to work out how long it will take you to save a deposit. This should take into account your incomings and expenditure and any savings that you already have. In order to save faster you should look at ways you can cut down your spending (such as making lunch for work or reducing your holidays abroad) and increase your earnings (take on a part time job or ask for a pay rise if you have been at your current job for over a year).
3) Buy property further out of the city
First home buyers tend to get carried away in thinking that the first property that they have to buy needs to be their dream home in their dream suburb. For most of us this is impossible and what first home buyers should actually be doing is purchasing a property in an area in which they can afford. This might mean living further out of the city to start with, especially if you are purchasing a property in Sydney. However to get to where you want, you need to make some sacrifices along the way and be realistic with your expectations.
4) Look out for projects offering 5% deposit
If buying a property off the plan then most projects require a 10% deposit. However, in some instances there are some projects that only require a 5% deposit, making it far easier to save up the required deposit.
5) Buy with someone else
Buying a property with someone else, rather than alone, makes it much easier to save up the required deposit. If possible, buy with your partner or family member, which will allow both of you to get a foothold into the property market.
6) Buy as an investor rather than as a first home buyer
Many first home buyers today are buying as an investor rather than as a home buyer. Buying your first property does not mean you have to live in the property, so buying a property in a high growth location has great potential to provide you with equity for property number two. You could also take advantage of the first home owner grant by living in the property initially before turning it into an investment property.
Some experts also believe that stamp duty should be abolished as it imposes an additional cost on property transactions, which makes a property purchase even less affordable and can mean the difference to buying a home or to continue renting. Some people also believe that the first home owner grant should be brought up to speed to today’s current property market to reflect today’s prices and should be increased and not reduced as is the case for New South Wales which is reducing from $15,000 to $10,000.
Even though a HomeStart scheme can help first home buyers purchase a property easily and get a foothold in the property market, having this sort of scheme rolled out throughout Australia can have a negative impact and increase financial risk. Governments should look more closely at supply issues first and introduce more new housing which in turn will help affordability.
It is important something happens soon as home loan approvals for May have fallen 6.1 per cent from 53,643 approvals in April to 50,366 in May. This might have something to do with the banks and lenders becoming stricter with their lending which isn’t necessarily a bad thing, but is yet another obstacle in the way for homeowners to get on the property ladder to buy their first home.
Published on 15th of July 2015 by Marty Stanowich