More and more first home buyers in Australia are preferring to invest first rather than buy, according to new research.
A recent survey by Mortgage Choice found that around 36.6% of property investors were first home buyers. This number is significantly higher than the 21.1% recorded around the same time last year.
Buying your dream home the first time around is pretty tough, especially when you consider the average house price in most Australian capital cities, particularly Sydney.
Home Loan Experts senior mortgage broker Hank Hong believes that based on the current environment, first home buyers are taking the right approach to achieving their financial goals by investing in property first and here’s why.
House prices are through the roof!
According to Domain’s June quarter report on Australian house prices, Sydney’s median house price has tipped over the $1 million mark for the first time ever.
That’s almost $350,000 more than the nationwide median house price of $658,608.
If you can afford the costs then go for it and buy the home you really want. If you can’t then buying your dream house can be a medium to long term goal if you can just get your foot into the property market first.
Hank said first home buyers may want to consider:
- Buying something much smaller or going interstate. This will help you generate income (ideally capital growth) to help you fund your home purchase down the track.
- Buying a couple of investment properties to match the price of the house you want to buy.
- Renting where you want to live with two to three investments for a few years. This can be a stepping stone for you to buy a property.
- Selling the investments later or increasing your investment portfolio further to save for your new purchase.
Having $1 million in investment debt can do a lot more for you than having $1 million in residential debt, according to Hank.
He added that with an investment property, there are several tax deductions you can claim including negative gearing and asset depreciation. Buying an owner-occupied property will not allow you to leverage these benefits.
What should first time investors look out for?
Buying a home is a bit of an emotional rollercoaster for a first home buyer: hard decisions need to be made about the size of the home and the land and how it fits with your lifestyle and long term plans, including having children (if you don’t have them already).
Property investing can still have that emotional bent but a lot more research needs to undertaken when weighing up the potential return on investment over a shorter period of time compared to the typical term of a mortgage.
Hanks said that it helps to remove yourself from the equation when calculating the costs of buying and living in an area: your personal preferences and desires shouldn’t dictate your decision. In saying that, try to avoid areas with poor infrastructure or high crime rates.
It may be a good idea to go interstate or at least buy an investment property outside the metro area to start your investment portfolio because people who rent generally live outside of major cities because they’re expensive.
Although he believes it’s better to get on the front foot in a property market that is continuing to grow, Hank said the new and upcoming policy changes to investment loans will be a difficult challenge for first home buyers to take the leap into an investment property.
The key is to move quickly!
What changes have APRA made to investment lending?
Earlier this year, the Australian Prudential Regulation Authority (APRA), the banking industry watchdog, introduced requirements for APRA-regulated lending institutions, including the four major banks, to cap their annual growth of investment lending to 10% of their total loan book.
Some of the major banks were way over this 10% cap which meant that most of them have since been tightening up their policies to make it tougher for investors to get a loan.
These policy changes include:
- Higher interest rates: Some banks have already started increasing interest rates on investment loans. For example, Commonwealth Bank (CBA) has started cancelling pricing requests for investment loans.
- You’ll need a larger deposit: Bankwest was the first to move on this, pulling back on 95% LVR loans to 80% LVR.
- You can’t borrow as much: Many lenders have switched to different methods of assessing your borrowing power. For instance, St George has increased their assessment rate, AMP has decreased the amount of rent they will consider when assessing your income and National Australia Bank (NAB) no longer uses negative gearing benefits in their assessment.
- Foreign investors won’t be able to borrow as much: A few banks have already reduced their foreign investment loans. For example, Westpac and St George have reduced their foreign investor loans from 80% LVR to 70% LVR.
Again, these rules only apply to banks and lenders that are regulated by APRA which means that there are specialist lenders that still offer investment loans at higher LVRs.
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Disclaimer: The preceding comments are to be taken as opinion and not financial advice. We recommend that you seek guidance from an independent financial adviser before considering investing in property.