First Home Buyers – Is Now The Right Time?

July 20, 2009 - PRLog -- First home buyers have entered the property market in record numbers in recent months off the back of boosted Federal Government grants, record low interest rates and softening property prices.

Intended to help keep the Australian property market buoyant, the increased grants have certainly done their job well.

First home buyers have had access to an initial $7000 to buy a home, as well as a boost of $7000 (to $14,000) for people buying an existing home and $14,000 (to $21,000) for people buying or building a brand new home, in addition to various state grants and concessions.

As a result of the recent Federal Budget, the boosted grants in their current format will be available until September 30 before being halved from October 1 to December 30, with those buying established homes receiving $3500 while those buying new homes will receive $7000.

This means the former will get a total of $10,500 and the latter will receive $14,000 when combined with the base $7000 grant.

The grants will revert to the original $7000 from January 1 next year.

Coupled with an unprecedented drop in the RBA cash rate from 7.25 to 3.00 per cent in the space of only a few months, tens of thousands of Australians have taken the leap and bought their first home.

Many others are predicted to make the move in the next few months before the boosted grants run out.

Also at play in the first home buyer frenzy has been a slowdown in the property market in virtually every Australian state which has seen prices soften and plateau.

However, there are some concerns about the sustainability of some people entering the market for the first time.

A recent report suggests that the average loan size for first homebuyers has risen 23 per cent in the past two years, to $280,600, raising fears about the ability of thousands of young buyers to manage their debt in a rising interest rate environment.

While it is difficult to predict future interest rate movements in such a globally tumultuous time, the fact that the Reserve Bank of Australia (RBA) has left rates unchanged for the past couple of months may suggest that we are close to the bottom of the cycle.

While it can be difficult to determine just when rates will start to climb, the reality is that lenders' rates – which are now around 5-5.5%p.a – are at record lows which means they will go up at some stage, ultimately probably by several per cent. That means is it vital that those entering the market do not over commit, basing their affordability on the rates currently on offer. Historically, lenders' rates are generally more likely to be around the 7-8%p.a mark, adding hundreds of dollars to monthly loan repayments.

Those looking to enter the market before the boosted grants end in the coming months still need to ensure they have much more behind them then just government money. Lenders are still looking for a savings history and a deposit of at least 5-10%, but preferably up to 20% of the property’s value.

A buffer with as much equity as possible in the property is also a sound strategy at a time when there is uncertainty about the future of house prices in the next 12 months or so.

Experts are divided on the direction of house prices in the coming year. Many believe that the undersupply of homes available to meet the demand of a growing population (largely as a result of high migration levels) will see prices remain stable or rise slightly. Others argue that a rising unemployment rate (with predictions that up to a million people could be unemployed if Australia enters into a recession) may result in prices coming under pressure.

While the fundamentals of property remain, first home buyers – and all property investors – need to take a long-term view in this current environment. A property purchase at this time needs to be manageable at both today’s rates while allowing for future rate increases, as well as some fluctuation in the value of the property you buy.

Gambling on interest rate movements is dangerous. Sound advice from a trusted mortgage adviser and a long-term view will ensure that you head into your first home with a sustainable position.

By Karen Baldwin

For more information or to talk to a Smartline Adviser, call 1800 020 066. http://www.smartline.com.au/

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About Smartline: Established in 1999, Smartline is an Australian-owned finance broking company which operates through independent franchise owners throughout Australia. Our vision is to set the benchmark in Australian mortgage broking for client care. All Smartline Mortgage Advisers are fully qualified and trained mortgage broking professionals who “live and breathe” home loans. They’ve joined Smartline because they are people who are motivated by getting great outcomes for their clients, every time. Stringent standards ensure that the loan application is hassle free. It works.

Smartline is the proud winner of two of the industry’s most prestigious awards for best mortgage broking group, the Mortgage and Finance Industry Awards 2007 and the Australian Mortgage Awards 2006.