The tough question facing first home buyers: spend more time or more money?

Many first home buyers are having to make the tough choice between waiting additional years to save a large deposit or spend thousands of dollars extra to buy a property sooner.

It would take 7 years and 9 months to save a 20 per cent deposit with stamp duty for a typical Sydney apartment, if a first home buyer was stashing $400 a week into a savings account accruing 1 per cent interest, according to a RateCity analysis.

An apartment in Melbourne would take 5 years and 3 months under the same savings regime. For Brisbane, it’d take close to 3 years and 8 months.

And then there’s houses. Buying a house in the aforementioned cities would add an additional 2 to 4 years in savings time. Saving a 20 per cent deposit for a house in Sydney, for instance, would take longer than a decade.

Time vs Money

Banks generally charge lenders mortgage insurance (LMI) to first home buyers who have a deposit less than 20 per cent. The fee -- typically costing thousands of dollars extra -- helps banks hedge the risks of a mortgage default by adding extra cash to their balance sheets. 

A recent government report found people could get into the property market years quicker if they could secure properties with smaller deposits and not have to pay LMI.

Buying a property with a smaller deposit may mean people can save on rent, but this could be offset by the cost of servicing a more expensive loan, Sally Tindall said, research director at RateCity. 

“For most lenders, a deposit that falls short of 20 per cent means you’ll have to fork out for LMI which can run well over $10,000,” she said.

“It also means your monthly repayments will be higher and you’ll pay more in interest over the life of your loan; two factors that could potentially be offset by rising property prices, but in this market, isn’t a given.”

Budding buyers should keep four things in mind before making a decision, Ms Tindall said.

1. Spend within your budget
2. Find a savings account with a competitive interest rate
3. Compare mortgage interest rates and calculate repayments to help you work out how much you’re comfortable borrowing
4. Find out what grants or government subsidies are available.

One way to help people figure out if paying LMI is worth buying a property sooner is to consider the affordability of servicing the loan, Kent Lardner said, a location analyst and chief executive of SuburbTrends.

“My personal view is affordability is the elephant in the room for first home buyers,” he told RateCity.

“I personally would never shy away from using LMI, as long as you can afford the repayments.

“Given current interest rates, I would focus very much on how you can service the loan.”

A government subsidy that could save four years

The federal government has made it possible for thousands of people to buy a property with mortgage deposits as small as 5 per cent while not needing them to pay loan mortgage insurance.

The first home loan deposit scheme makes it possible for people to secure a mortgage with a deposit as small as 5 per cent. This is because the government’s $400 million scheme guarantees the remaining shortfall; the gap between the borrower’s deposit and 20 per cent. 

The scheme has helped first home buyers enter the property market four years quicker on average, the first report on its progress claims. In NSW, people were able to enter the market five years quicker. 

About 10,000 applicants are approved each financial year for the scheme.

A forecast of falling property prices: bank

The traditionally steady property market is enduring a period of volatility due to the uncertainty brought by the COVID-19 pandemic, according to banks, analysts and industry experts. 

Banks have forecast drops in major city property prices, although some have revised their estimates as the country is generally dealing with the pandemic better than expected. 

While some investors believe a drop in property prices presents opportunity, Ms Tindall said trying to time a property purchase in the midst of a pandemic is going to be tricky. 

“If you are looking to buy your first place to call home, it’s worth taking a step back and looking at the bigger picture,” she said.

“Does it suit your work life? Does it suit your lifestyle? And most importantly, is it something you know you’ll be able to afford, even if things get worse financially?

“Bargain hunters are likely to spend the next few months trying to pick the ‘right’ time to buy, and even then, there’s a chance they won’t get it right.”

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