As property values constantly fluctuate, and with rising costs of living, it may feel harder than ever to get into real estate investing.
But there are different ways of investing in real estate.
Finance guru Effie Zahos reveals the four ways to get into the property market as a first home buyer, even if you don’t have a 20 per cent deposit.
1. Low-deposit home buyer schemes
First Home Guarantee
This is open to 35,000 first home buyers this financial year. It can let you get into the market with 5 per cent deposit, and as the federal government guarantees the remaining 15 per cent, you don’t pay Lenders Mortgage Insurance (LMI) – a big saving.
To be eligible, singles can earn up to $125,000 annually, or $200,000 for couples combined. Price limits also apply to the home you buy as shown in the table (opposite page).
Family Home Guarantee
Single parents can access the Family Home Guarantee, which offers 5000 places each financial year up to June 30, 2025. Eligible buyers need only a 2 per cent deposit, with no LMI to pay.
The same property price limits apply for the First Home Guarantee, and single parents must earn below $125,000 annually. The Guarantee is available even if you have previously owned a home.
Regional First Home Buyer Scheme
This will kick off in January 2023 to help 10,000 first home buyers across regional Australia make an investment on properties with just 5 per cent deposit.
The pluses: Buying with a 5 per cent deposit lets you get into the market sooner, beating potential price rises, with savings on LMI that can add up to tens of thousands of dollars. It also means you can stop paying rent and start building wealth through property.
The drawbacks: Buying with a very small deposit means taking out a bigger loan, and this means paying more in monthly repayments than if you had a larger deposit. This could leave buyers thinly stretched if interest rates rise further.
A wafer-thin deposit also leaves home buyers heavily exposed to property market downturns. This can lead to ‘negative equity’, where the value of the loan exceeds the value of the home. The only solution can be to keep slogging away at the mortgage until the market picks up and values begin to rise again.
2. Bank of Mum and Dad
Canstar’s latest Consumer Pulse Report found 21 per cent of Australians believe parents should support their children to buy a first home.
One easy option is to let adult children stay in the family home longer in an effort to boost their savings. Parents can also offer to act as guarantor for their child’s home loan.
No cash changes hands, but by using the equity in their own home as collateral, parents can help a first home buyer achieve the equivalent of a 20 per cent deposit, thereby avoiding LMI. Alternatively, parents can provide a cash gift or loan part of the cash needed to achieve a 20 per cent deposit.
The pluses: The support of parents can help first home buyers make an investment in real estate sooner. And if everyone is comfortable with the arrangement, it can bind families closer together.
The drawbacks: Agreeing to act as guarantor brings significant risks. If a first home buyer cannot keep up the mortgage repayments, parents can be asked to make good with the loan.
Agreeing to be guarantor can also limit parents’ ability to take out a loan for their own needs. Bear in mind, banks still want to see a healthy track record of savings. So, gifting or loaning large sums of cash won’t necessarily get your adult child over the line for their first home loan.
If the bank of Mum and Dad is open, be sure to limit your guarantee, work out an exit strategy, check that your child has insurance in place to protect their income, consider the family dynamics (if you help one child, you may have to help the other) and always get independent advice.
3. Shared equity schemes
The Albanese government has committed to launching Help to Buy, a scheme that’s expected to cut the cost of investment in real estate – ie: buying a home – by up to 40 per cent.
Home buyers need at least 2 per cent deposit, and the federal government will chip in up to 40 per cent of the purchase price of a new home, or 30 per cent for an existing home.
Similar schemes are already operating in several states, including Western Australia and Victoria. The NSW government is launching a shared equity scheme in January 2023, with 3000 places available in the 2022-23 and 2023-24 financial years.
The pluses: These schemes substantially lower loan repayments and eliminate the cost of LMI.
The drawbacks: Home buyers aren’t required to pay rent on the portion of the home held by the government, though it’s expected that the government’s share will be paid down over time or paid back if you sell.
OwnHome buys the home, while you make an initial payment of 3 per cent of the price, with 1 per cent going towards a ‘security deposit’. From there, you pay the equivalent of fortnightly rent – 35 per cent of which goes towards your security deposit.
After three to seven years, you can elect to purchase the property using the accumulated security deposit.
The pluses: Rent-to-buy can be a way for renters to grow a deposit. The price to buy back your home is set at the time of purchase, which provides a clear target to work towards. The catch is that, if the market falls, you could end up paying more than the place is worth.
The drawbacks: The fine print can be complex. In particular, after renting and saving with OwnHome for up to seven years, if you can’t secure a mortgage, you may have to enter into a hardship arrangement, or you want to walk away from the deal, you could forfeit the security deposit you’ve built up.
It’s also important to note that with rent-to-buy schemes you don’t own the property until it settles.