“The bank says I can’t afford a $950 mortgage so I pay $1400 a month in rent instead.”
How true is this! It’s from a meme doing the rounds on social media. I wouldn’t be surprised if you had a bit of a chuckle but it’s no laughing matter if you’re on the receiving end.
It got me thinking, why is it that renters – more specifically long-term renters with proven rent serviceability – are not afforded the same assistance as first home buyers or single parents when it comes to home ownership?
As Hayley wrote to me on social media: “There seems to be assistance there for first home buyers, not for those who are trying to get back into the housing market.” Hayley and her second husband previously owned homes, but following their divorces they were not left with much money to be able to repurchase. With three kids and rental commitments of $500 a week, not to mention rising property prices and rents increasing, Hayley described trying to get back into the property market as an “uphill battle”.
CoreLogic data showed that despite rapid increases in property values since late 2020, rental affordability is becoming a bigger issue than mortgage serviceability. Its analysis found that as of July servicing a mortgage is cheaper than paying rent on 36.3% of Australian properties, which is higher than the pre-COVID proportion of 33.9% reported in February 2020. This highlights the major barrier to home ownership remains the deposit hurdle.
So what do you do? I’m a great believer that you need to carry some of the risk so, in my opinion, getting a home loan without a deposit is not the solution. We also reached out to Peter Koulizos and David Bassanese for their thoughts and both were pretty much on the same page as me on this.
Here’s where things get interesting… We have schemes such as the First Home Loan Deposit Scheme and the Family Home Guarantee which allow first home buyers and single parents to purchase a property with a deposit as low as 5% and 2% respectively. The property price cap restrictions, maximum income requirements and limited spots, however, omit a good segment of the market like Hayley and her husband.
Some lenders offer home loans to people with a 5% deposit but you’ll have to pay lenders mortgage insurance (LMI). If you had a 5% deposit for a property worth $800,000, LMI would set you back around $30,000. Some lenders are happy to waive LMI if you’re in a certain occupation or if your deposit is 15% rather than the typical 20%.
The issue isn’t so much that there isn’t a solution but rather there is no consistency as to what is on offer. If the objective is to help as many Aussies into home ownership then long-term renters with proven serviceability and acceptable security should be afforded the same opportunities.
Ideally, why not allow renters (regardless of occupation) who have a proven long-term rental history access a 5% deposit home loan without the need for LMI, without price caps or maximum income requirements?
Instead, set the repayments based on the lender’s buffer rate. Financial institutions will generally add an interest rate buffer to their assessment – a minimum of 2.5% – when working out whether you can afford the loan. In other words, could you still afford the home loan if interest rates were to rise by 2.5%?
This will allow them to build up equity faster. Once they reach 20% equity, then their repayments can be changed to the standard rate. If they can afford to make these repayments then they can afford a home loan. It’s a simple suggestion, and perhaps one that is filled with flaws, but I hope it gets the conversation started.
Take a look at what Peter Koulizos and David Bassanese had to say.
It can be quite difficult to save a deposit for a home. There are first home owner grants available but these are generally only available for new homes. The vast majority of home buyers who want to buy established homes don’t have much, if any, assistance.
There are a number of strategies that could help renters into the property market. We could allow renters to buy property with no deposit but I am not a big fan of this option. I believe that all borrowers should have “some skin in the game”.
If, for example, you want to buy a $600,000 home, you can’t expect someone to lend you the whole $600,000, plus the fees. This is what happened in the US in the early 2000’s and it was this type of risky lending that was a contributor to the Global Financial Crisis.
Some aspiring home buyers might feel that a 5% deposit is too big an ask but compared to what happens globally, a 5% deposit is actually one of the lowest required deposits in the world.
I believe there are two better options to help renters into the property market. They involve government assistance and some initiatives are already in place.
There’s the First Home Loan Deposit Scheme. Usually, first home buyers with less than a 20% deposit need to pay LMI. Under this scheme, people can purchase their first home with as little as a 5% deposit and not have to pay any LMI. If we use the $600,000 home as an example, $24,000 of LMI would normally be payable if you only had a 5% deposit.
Some state governments provide relief to first home buyers by discounting or abolishing the stamp duty that would normally be payable. The stamp duty on $600,000 property varies depending on which you state you live in but it generally would be about $25,000.
In summary, rather than allowing a renter to buy a property with no deposit, I’d prefer that they have at least a 5% deposit and don’t need to pay lenders mortgage insurance or stamp duty. They end up with a home and they have skin in the game.
With interest rates so low, the good news for aspiring property buyers is that, in many cases, it now seems that paying a mortgage stacks up relative to renting.
Ultimately, however, decisions on what is the appropriate level of deposit required for home purchases do and should rest with those lending the money – after all, it is their money and their risk. The market should be able to decide this, provided everyone has good information and appreciates the risks.
If banks or other lenders, for example, judge young people with a good rental history as a low enough risk to keep paying their mortgage – even with a low deposit – then the market will likely find a way to provide the money, unless there are artificial regulatory barriers in place. But currently, there seems to be no explicit legal barrier to banks providing finance with low deposit requirements – it simply comes down to their assessment of market risks.
What is key is whether, due to a low deposit, the overall loan required and resulting loan servicing cost is manageable for the borrower. If the borrower has a high enough income or is seeking to buy a cheap enough property, I would argue that a low deposit should not be a barrier to getting a loan.
That said, lenders like to see some level of deposit as it demonstrates a disciplined approach to finances – but then again, so does a consistent record of paying rent, and a consistent employment history.
It seems to me if you are prudent in what you are seeking to buy, and you have a good income and rental payment history, it should be possible to get financing – even with less than a 10% deposit.
Would-be borrowers should look at the range of government support available, such as the first home buyer’s scheme. There are also options where parents or other family members can provide certain guarantees, reducing the need for one’s own deposit. All up, borrowers need to present their best case and shop around.
Even with good financial prospects, however, a low deposit might mean lenders demand you stump up for LMI – which adds a little extra to your monthly mortgage bill. If so, that will make it even more imperative that the home’s value is not too large relative to your income, that is, you are capable of servicing the loan, even with mortgage insurance on top.
David Bassanese is Chief Economist at BetaShares.
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