The Plight of the First Home Buyer

This year we’ve been able to be a part of quite a few First Home Buyer purchases and particularly of late. With the introduction of the full Stamp Duty Concession for purchases under $600,000 since July 1 2017, this contingent has been a powerful force in the metro markets.

Aside from dealing with inexperience, competitive buying conditions and the need to compromise on criteria, First Home Buyers face another tougher challenge than most other groups of buyers.

The majority of FHB’s are deposit-sensitive.

This means that for many, their deposit determines their borrowing capacity.

Every dollar they save represents an additional $19 in available borrowings for those who are borrowing at their maximum rate. Spending money on building inspections, Buyers Advocate fees and other expenses not only costs them in savings, but in borrowing power.

For every loan application, lenders will focus on three elements;

1. Minimum required deposit
2. Servicing; the ability of the applicant(s) to make regular repayments. This relates to their ongoing employment.
3. The character of the applicant; past credit behaviour and job-stability.

FHB’s who have diligently arranged their pre-approval will have had their incomes and character assessed via their credit application. In most cases, the amount that the bank would be willing to lend them if deposit savings were 20% is greater than what is actually granted.

This is because most first home buyers find it a serious challenge to raise 20% in deposit savings.

There are three options for FHB’s who face conditions such as this, and a potential fourth subject to their parents’ ability and willingness to help them with a “Family Pledge” type loan product.

These options are:

• Continue saving, but risk saving in the face of a moving market while values continue to rise,
• Borrow as much as the lenders are willing to loan, but capitalise the cost of the mortgage insurance premium into the loan. (Mortgage Insurance is a relatively expensive once-off premium which applies when borrowers take on a debt equating to more than 80% of the value of the property. The higher the “Loan to Value Ratio”, the higher the rate of Mortgage Insurance). In many cases, it’s a commercial cost that enables buyers to get into the market far quicker than the traditional pace of saving would allow, but the risk and cost must be factored into the decision,
• Consider other more affordable options, areas or even regional cities, or
• For those who’s parents or immediate family are eligible and willing, assistance with a “Family Pledge” loan (otherwise known as a Related Third Party Security Guarantee) can make all of the difference, but it’s highly controlled and the process is so formal that it requires legal sign off.

This past fortnight we proudly assisted first home buyers from each of these four categories.

One incredible couple had saved more than 25% in savings and managed to secure a stunning three bedroom townhouse in Coburg. Their savings regime had spanned years and they had been out in the market bidding at auction and scouring opportunities for over six months when they reached out to us to help them. Pouncing forward with a firm start on an auction property was our strategy and in the face of three other competing buyers, our margin was close but our first offer prevailed.

Another lovely couple just missed their desired property at auction last weekend in Carrum. The result was particularly heart-wrenching because they were the under-bidders, and it’s near-impossible to know where the winning bidder would have been prepared to stretch to. A $500 bid above a buyer’s limit always hurts.

Our most recent Ballarat acquisition was that of a professional couple’s, and it was a home purchase. They secured a stunning Federation era house within easy walk of Ballarat’s Bridge Mall shopping precinct for $357,500. Noting that the rail commute is a mere 70 minutes on a VLine train at 160km/hr, they determined a while ago that this city would enable them to have all of the nearby amenity and features in a home that a Melbourne option wouldn’t allow at this price.

And our last exciting purchase was a villa unit in West Footscray for a first home buyer whose Mum stepped forward with equity to assist. By providing the 20% in equity, our FHB didn’t need to borrow an additional Mortgage Insurance premium and she could borrow to her maximum allowable borrowings while retaining some cash in the bank as a buffer for her new voyage. Her Mum’s equity is not a gifted contribution, but a loaned one. Like all borrower’s facing this type of lending scenario, they have two loans in place. The first is the 20% which is secured against their family member’s property. Their second is the 80% which is secured against their new purchase. They commit themselves to paying down their first, smaller loan as the priority, and if values rise, they may be able to release their family member’s property earlier than calculated.

It’s a significant help and a special one.

Banks don’t take it lightly and borrowers need to comprehend the importance and generosity of the gesture. A family member takes a considered risk when they put up their own property as a part-security. This is why the process is so laborious and comes with legal documentation and a requirement for a lawyer to sign off the arrangement.

First Home Buyers do have options, and the key is a combination of hard work, perseverance, determination and support from family and friends. Support comes in all shapes and sizes, from encouragement to (in some cases) equity help.

My two best points of advice to FHB’s is as follows;

Try not to lament when an auction or negotiation doesn’t go your way, but to re-evaluate whether you were close and ‘in the game’, or aiming for something that was always beyond your budget. If the latter, start focusing on some sold results in and beyond the area you have been targeting and be prepared to compromise on some of your criteria in order to have a realistic and feasible search.

Don’t let the quest for The Perfect Property hamper your success. This is an important purchase, but most likely not your “forever” home. Some buyers apply so much critiquing to what would otherwise be a high-scoring option and miss out on good property after good property. In a rising market and when lending constraints are only increasing every few weeks, this can be a recipe for disappointment. Being happy, secure and proud is what a first home should represent, not a perfect castle in the blue ribbon locales.

We all start somewhere.

Wishing our First Home Buyers thee happiest and proudest of settlements.