Easy loans for first home buyers is a recipe for disaster
THERE is been a lot of publicity recently about some lenders who are allowing first homeowners to buy properties on minimal deposit.
In some cases, they are even using the first home owners grant in conjunction with a personal loan.
This is a recipe for disaster.
The tradition of banks requiring loan applicants to have saved something towards their first home is soundly based.
This is because experience has shown that borrowers who have invested some of their own money into the deal will be much more likely to stick with it. Those who have put up no money are more inclined to walk out if they get into financial strife, leaving the bank to foreclose on its mortgage.
Unfortunately, in the excitement of choosing their first home many young people overlook the fact that buying a home is much more expensive than renting.
Robyn and Geoff can rent a $400 000 house for $400 a week, $20,800 a year. They decide to buy a similar home and borrow $400 000 at 6% over 25 years to do it, using the first home buyers grant for purchase costs, removal expenses and mortgage insurance. Their payments are $2580 a month, or $30,960 a year and face additional costs of at least $3000 a year for rates, insurance and maintenance. The extra cost of ownership is $253 a week or $13,160 a year.
If they can't save a deposit when their costs of occupancy are $20,800 a year, how can they possibly cope with ownership costs of an extra $13,160 a year.
This is not a suggestion that young people should not strive to buy their own home, but in most cases they are far better off to wait until they've saved a reasonable deposit. If they can't do this while they're renting they would almost certainly face problems when they find themselves saddled with a large mortgage.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.