Question: My daughter is about to sign up for a 5 per cent deposit to get into her first home, but I'm worried she isn't looking at how to pay off the loan long term. I'm concerned that the move is premature, and that she doesn't have enough of a deposit to be buying yet, particularly given that a change in circumstances is always around the corner. What would be your advice for anyone considering it?
Answer:
It's understandable that you're concerned for your daughter. Buying a property and knowing that you can pay for it is a big undertaking.
The 5 per cent deposit scheme enables eligible first home buyers to buy a home with a smaller deposit, bypassing the need to save up the usual 20 per cent to qualify for a home loan.
It dramatically shortens those timelines, so it's no surprise that your daughter is trying to strike while the iron is hot.
So far, the scheme has helped more than 250,000 first home buyers into the market and save more than $2.3 billion on Lenders Mortgage Insurance costs at the same time.
But not everyone is convinced that the scheme helps young people. The International Monetary Fund has warned that the scheme risks driving up prices, advising the program should be limited to the purchase of new homes only.
While the scheme can help first home buyers enter the market sooner, it should not be mistaken for making the property itself more affordable.
The fact is that the buyer is still taking on a loan of up to 95 per cent of the value of the property, and the guarantee from the government ultimately protects the lender, not the buyer, if the market falls.
Read more: Should we still buy property with our SMSF
Lloyd Edge, founder of Aus Property Professionals and author of Set for Life says he's concerned that buyers can focus so heavily on reaching the 5 per cent deposit that they overlook whether they can comfortably service the loan over the next 20 or 30 years.
"Before proceeding, your daughter should consider how she would manage the repayments if interest rates rose, her income changed, or she faced an unexpected period without work," Edge says.
"She should also avoid using every dollar she has for the deposit and purchasing costs. A separate emergency buffer is essential."
What you can do is help your daughter get a clear picture of the costs involved in home ownership.
Finder points out that more than half of Australian mortgage holders now spend more than 30 per cent of their take-home pay on repayments - which is the traditional threshold of mortgage stress.
Make sure her budget includes all the hidden extras that come with home ownership - not just utilities, but conveyancing and legal fees, pest and building inspections, transfer fees, ongoing maintenance, loan application costs, stamp duty, insurance, council and water rates and of course, the cost of moving.
The fact is that with only 5 per cent equity, even a relatively modest fall in the property's value could place her in negative equity.
Read more: We are looking to downsize but what are the tax implications
Edge points out that doesn't necessarily create an immediate problem if she can continue making repayments and hold the property for the long term.
However, it can become a serious issue if a change in circumstances means that your daughter needs to sell or refinance sooner than planned.
"The decision should be based on borrowing capacity, cash flow, financial buffers and the quality of the property being purchased, not simply the opportunity to buy sooner," Edge says
"In some cases, waiting to build a larger deposit or considering a more affordable property may create a much stronger financial position."