The combined value of Australian residential real estate has touched $7.2 Trillion (CoreLogic Data). It is, thus, no surprise that more and more people are gearing up to buy their first home, especially when cheap home loan deals are still available, considering the possibility of a future rate hike.
In any case, the charm of staying in your own home is incomparable, isn’t it? But, considering that combined capital city house values have increased by 10.9 percent over the past 12 months (until July 17), with dwelling values in top cities, Sydney and Melbourne, higher by 12.4 percent and 17.2 percent, respectively, are you sure you can afford the house of your dreams in the area you really wish to stay?
In December 2016, The New Daily published an article revealing that ‘a hard-saving couple will need 4.9 years to squirrel away a deposit for a median-priced house in one of the capital cities.’ More recently, UBS modelling showed that ‘first home buyers need 40 years’ worth of savings for a Sydney deposit’.
Support for Home Buyers
Of course, first home buyers purchasing their own home could boost their savings with State Grants and stamp duty concessions. They can also opt for parent guarantee loans or pay LMI to secure a high LVR loan. However, there is a more affordable way for first home buyers to step into the property market.
Rentvesting, or renting where you want to and investing where you can afford to, is fast catching up with savvy first home buyers who are comfortable with the idea of buying an investment property as their first home. This not only allows them to continue with the lifestyle they are used to but also allows them to use the rental income from the investment property, and the gradually building equity, to fund their own home much sooner, without undergoing significant financial stress. Investment properties also offer major tax benefits that investors can gain from.
Experts suggest first home buyers may be better off buying an investment property over their own home.
Let’s see how:
Linda and John pay a monthly rent of $1,900 for a home priced around $750,000. The couple, armed with some decent savings and solid rental history, decides to buy a similarly priced property, instead of renting. Below is a snapshot of their financials:
Deposit Saved – $75,000 (10 percent)
Loan Amount – $675,000 for 30 years at 5 percent per annum
Repayment Amount – $3,623.55 per month
Before they took the plunge, a friend suggested they take a look at a few affordable investment properties in an outer suburb that offered good rental yield. The couple liked one of the properties priced at $500,000. Thus, they decided to continue renting and buy an investment property from their surplus monthly cash flow of $1723.55 ($3,623.55 – $1900).
Deposit Saved – $75,000
Loan Amount – 425,000
Repayment Amount – $2,281.49 per month.
[State grants are not available for purchasing an investment property.]
In the above scenario, considering the rental income from the property and tax deductions available to investors, it is quite likely that the rental income and tax credits for the property would offset the mortgage repayments for it. As Linda and John continue to pay off the mortgage, they will also build equity, which they could use to fund their own home in a few years.
“As the soaring property prices make it difficult for first home buyers to save a deposit for their first home, buying an investment property as a first home could be a savvy option for many. By purchasing an affordable rental property in a well-researched area, buyers can build a large deposit for their homes by leveraging the equity in their well-appreciating investment property,” says Ruth, the mortgage broker who helped Linda and John finance their property.
Buying a well-researched property
First home buyers who are looking to break into the housing market could benefit greatly from rentvesting. Affordability is a major factor to consider when buying a house. Instead of paying too much for a popular suburb that may have already peaked, it is smarter to look out for upcoming suburbs that are currently affordable but well serviced. Most of these areas fringe the popular suburbs, sharing the amenities but offering low-priced houses. Spot the next upcoming suburbs for your investment.
Being financially disciplined is the key to growing wealthy. Those who plan to buy a property must take a look at their expenses, and follow a household budget that minimises extra expenditure and maximises savings. Use our online calculators to set a budget or savings target.
Choosing the right home loan
Several banks, as well as non-bank lenders, offer home loans at competitive rates. When searching for a home loan, it pays to shop around and compare home loan deals online to choose one that best fits your requirement. However, borrowers must understand that instead of choosing the cheapest home loan, it is prudent to pick one with essential features (such as free additional repayments and redraws, an offset account, etc.) that will help them save more in the long run.
Seek expert advice
As a first home buyer, you might find yourself confused in a market flooded with jargon, self-professed experts and unsolicited information. Seek expert advice before making one of the biggest investments of your lifetime. HashChing is a borrower-friendly online mortgage marketplace that brings you closer to your dream home by offering low-interest rate home loan deals from 60 lenders across Australia. Compare mortgage rates online or get in touch with verified mortgage brokers who would gladly answer your home loan queries online, free of cost.
Fill in the form below if you would like us to put you in touch with a mortgage broker experienced in your local area.
By Vidhu Bajaj
HashChing Content Writer