With low interest rates pushing up house prices, it’s difficult for first home buyers to get into the market. Mortgage brokers and lenders often suggest getting parents involved to reduce costs and risks, but is this the best approach?
The short answer is – probably not.
Common mistakes of first home buyers
Though we come from many different circumstances, first home buyers often make similar mistakes. Money Crashers outlines some of the most common problems first home buyers encounter:
Your first home doesn’t have to be your last. Still, many first home buyers try to get the biggest loan they can get, and sadly, it’s not uncommon for lenders to offer people more than they can afford. Mortgage, utilities, insurance… The bills can pile up before you know it.
A smarter move is to take the time to figure out how much you can realistically spend on a mortgage over several decades. Even if your expenses go up, you can always pay back more of your mortgage quicker.
Not doing inspections or shopping around
In the fast paced world of real estate purchases and auctions, there’s a lot of pressure on prospective buyers to sign quickly on the dotted line. The same applies to home loans. Services like Finder.com.au and Canstar can help you compare home loans. When it comes to inspecting the actual house, be sure to look at everything from plumbing and roofing, to wiring and foundation. Consider hiring an inspector for a thorough job.
Not using an agent
Unless you work in the real estate industry or have intimate knowledge of the rules and regulations in place when buying a new home, it’s strongly recommended that you use a realtor or agent to act on your behalf. The cost of their work will be more than worth it.
Case studies in borrowing
You are sitting in Steve the bank manager’s office and he is trying to work with you to devise a strategy to get pre-approval on a property for you to bid on in two weeks.
You have saved a 10% deposit, but without more funds for the other 10% needed to bring you to 20% deposit plus the stamp duty payable, you don’t have enough to bid the amount you think you need to secure the property without paying mortgage insurance.
Steve then asks if your parents would lend you some money, or if they own their own home would they allow security be placed on their home to effectively bring you to 20% security and avoid you having to pay the once off mortgage insurance cost.
You had not thought of that before. Your parents have always been supportive of buying your first home but never really discussed helping you out financially to do so. You commit to call him back after speaking with your folks.
1. If your parents can afford it, they will offer
You were heading to the folks place for dinner that night anyway so decide to chat with them about it, but start to feel uneasy about asking for money on the drive there. Particularly as you have three younger siblings that at some time in the future will likely be in the same position as you and you know your folks haven’t got the capacity to give each of you cash for a deposit.
If your folks could afford to gift each of you and your siblings a 10% deposit with no obligation to pay it back, that is the best solution. But would you ask them for it? Probably not. Share with them your plans and if they offer assistance, well and good, but I would not encourage asking them for it (although you know them better than I do!)
2. Consider your siblings
Another option is that they could loan you the 10% deposit (even with interest) and you could pay it back, then loan it to your next sibling. However, I do not encourage this. Whilst loaning money between family members happens frequently, nearly as frequently it causes family relationship problems or, worse still, relationship breakdown. It gets back to the principle that the borrower is servant to the lender (Proverbs 22:7), and that’s not a good setup for family relations. In fact, Christmas dinner tastes a whole lot different when you owe money to a family member.
3. Security and equity
The other option Steve mentioned was that your folks could provide security of 10% of the value of the property you intend to purchase on their mortgage free home to avoid the mortgage insurance you would have to pay with your currently deposit. Some people are comfortable with this and it is unlikely that it will end in grief, but if you end up in one of the unlikely scenarios and your house investment goes pear shaped, you could cause your folks to lose money or even their home. Your folks are effectively going guarantor, which is another arrangement to avoid or get out of if you are in that situation (Proverbs 22:26-27, 11:15, 6:1-35).
Paying mortgage insurance is not a bad cost to ensure finances don’t negatively impact your family relationships, but you could always hold off and save a bit longer, buy a cheaper property if that were possible, or both.
So, what are you going to tell Steve when you call him back tomorrow?
What you can do
Rather than asking your parents for help, here are some things you can do to put yourself in a better position when buying your first home.
Keep a good credit record
When we’re young, we don’t often think about the implications of letting bills lapse or going into debt. In truth, your credit record is an important factor for banks when determining if you are worth risking a loan on. So pay your bills, pay back your loans, and keep your head above water.
Understand the tax system
Depending on your age, family status and financial position, there are many tax schemes and benefits that could help your borrowing position.
- For some first home buyers who can’t afford a home in their neighbourhood, it might mean investing in a place in a more cost effective area, and then negatively gearing that property.
- For others, it might mean looking at other tax write offs that can limit your tax contribution and increase your savings over time.
Being aware of what you want, what you have, and how you can reach your goals will put you in a better position to negotiate with real estate agents when it comes to the purchase of your home.
Think long term
Paying off your first home is a long term investment. For younger people, the focus is often on the immediate challenges of life, trying to get the best job, get rich quick, etc. Prudence is often a better course of action. Outline a strategy, take your time, save up and make smart choices. With a careful strategy, you will get there.
The content of this article includes advice that is general in nature and does not consider your personal situation. Christian Super encourages all people considering their options in retirement planning to seek out qualified professionals who can provide specific personal advice.