How to Buy Your First Home in a Competitive Market

Sydney’s median property price jumped 22.4% in the year to February, according to CoreLogic, so you might be forgiven for wondering how to enter the market amidst such fierce buyer competition.

OwnHome, which recently sold a minority stake in its business to Commonwealth Bank, offers one answer.

The rent-to-own startup will buy a home on your behalf and let you buy it back within three to seven years. Here’s how it works:

• You pay an upfront fee equivalent to 1.5% of your nominated purchase price
• When OwnHome buys your home, you pay another 1.0%
• After moving in, you make fixed monthly payments, equivalent to 2.5% per annum
• After three to seven years, you buy OwnHome out
• The buyout price is set at your original purchase price, plus a fixed capital growth rate of 3.8%, minus the monthly offset payments you’ve already made

The idea is that you get to enter the market ahead of schedule, because you don’t have to save a 20% deposit.

But conditions apply. For example, if you fail to keep up with your monthly repayments or fail to find the money to buy out OwnHome, you could lose your property. Also, when you do buy out OwnHome, you’ll have to pay stamp duty, conveyancing fees and possibly lender’s mortgage insurance (LMI) as well. So read the fine print carefully and get professional advice.

How to buy your first home sooner

If you’re a first home buyer who’s struggling to enter the Sydney property market, OwnHome is one potential answer. But it’s definitely not the only answer.

There are five other options, which fall into two categories:

• Reducing your deposit size
• Reducing your purchase price

Reducing your deposit size

1. Get a government guarantee. Typically, if you buy a property with a deposit of less than 20%, lenders will insist you pay LMI, which is an insurance policy designed to protect the lender in case you default on your mortgage. However, if you qualify for the First Home Loan Deposit Scheme, the federal government will guarantee 15% of your deposit. As a result, you’ll need to stump up only 5%, which will drastically reduce the amount of money you need to save to enter the market.
2. Get a family guarantee. You can enter the market even faster if you take out a family guarantee home loan. That’s because some lenders will allow you to borrow 100% (or even more) of the purchase price if your guarantor (who will generally be your parents) promises to stand behind the loan. However, in return, your guarantor will have to offer their own home as security and promise to cover your mortgage repayments if you fail to do so. Generally, once you’ve repaid 20% of the loan, the guarantor will be removed from the mortgage agreement. Family guarantees are not to be entered into lightly, because if both you and your parents fail to keep up with the mortgage, the bank could potentially seize their home. That’s why it’s advisable to get both financial and legal advice before going down this path.

Reducing your purchase price

3. Buy a unit. Ideally, your first purchase would be your dream house in your dream location. But this is unrealistic for most first home buyers. So, instead, it might be better to begin with a cheaper unit. At some point in the future, once your salary has increased and you’ve built up some equity, you could upgrade to a house. At that point, you could either sell the unit to fund the new purchase or rent it out as an investment property.
4. Partner with someone else. Alternatively, you could buy a house with a friend or relative, either as ‘tenants in common’ or ‘joint tenants’. That way, you’d immediately reduce your buying cost by 50%. However, buying a property with someone else comes with financial and legal implications, so make sure you get professional advice.
5. Rentvest. Another option is to buy a house on your own, but in a cheaper market, either in regional New South Wales or interstate. You would then become a rentvester – someone who rents where they want to live and invests where they can afford to buy.

Shore Financial has helped many first home buyers over the years, and can help you too. To discuss your options, call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.

To discuss your options, you can call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.