Saving for your first property in Australia, especially in the big cities has never been harder. We try to manage a well-balanced lifestyle that sometimes does not allow us to save as much as we should for a deposit to buy our dream home. In fact, saving the first 5% could prove very difficult if you are renting and/or you already have a family. The truth is, waiting a couple of years to save for your deposit can actually set you back in terms of the home you can afford now vs the home you will be able to afford once you have saved for your deposit.
For instance, buying an apartment in a hot Sydney suburb may have costed $700,000 one year ago, but buying the same apartment today would cost around $802,000 on average, according to the ABS RPPI index of 14.6% (source). This means that if you spent your first year saving $30,000 for example, you have already lost $72,000 ($102,000-$30,000) from the increasing value of the property by waiting to save for your deposit. Now, if we are more conservative, let’s say that the apartment only appreciated by 5%, this would be an increase in value of $35,000. It would still be more than what you actually managed to save!!!
On top of this, you have been paying rent to someone else, which could have been used to pay your own mortgage. The thought of this is puzzling. However, there are a few ways that you can actually start investing in property now and start gaining from the likely increase in value:
1. Cash out you inheritance in advance
Ask your parents to give you an advance on your inheritance. I am sure they would be more than happy to help you out if it means you will have your own home and more financial security for you and your family/future family. How does the sound of grand kids ring you parents ears?
2. Have you heard of a Family Guarantee?
A family guarantee is a limited guarantee that your parents, or close family members can provide, in order to fill your deposit gap. This limited guarantee can be secured by the equity in your family’s property or by certain other assets. You will then be able to borrow up to 100% of purchase price + purchase costs, and in some cases, you can also consolidate other debts. This will also allow you to avoid paying Lenders Mortgage Insurance (LMI) which only covers the lender in case of default. Something to take into account here, is that most lenders will ask the guarantors to seek independent legal advice before proceeding.
3. OPM – Other people’s money
This simply means that you could find someone with savings or equity to put up as a deposit and go in as joint tenants or tenants in common on the title. You may be thinking, why would someone do that? Well, for starters, this person may not have enough borrowing capacity to take out a loan by themselves, so if you have a stable income, you may be actually helping this person purchase a property that they couldn’t have otherwise afforded. Seeking legal and tax advice in these instances is key, it is always recommended that an agreement be in place as to who is entitled to what.
On the other hand, if you are the one with the deposit but you lack borrowing capacity, consider OPC (other people’s credit) and partner up with someone who will strengthen your credit application. Mortgage professionals can help you work out your capacity to repay before applying and make sure you do not enter into a product that is unsuitable for your particular circumstances. They can also assess how a particular partner would likely affect your application. Think about it, this person may have a good income but their living expenses and commitments may also be high, in which case, your application may not be better off. Seeking help in these situations is very important, and finding a broker/home loan specialist (who does not charge a fee for their home loan service) can save you a lot of time and money.
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