7 ways renters can enter the property market now that prices are down
You don't have to rent forever. It's a buyer's market in many cities.
By now you've surely heard that property prices are coming down. And if you're a renter who has been put off buying because of impossible prices, you've probably already been told that "now's your chance" to jump into the market.
That may be true, and this guide will give you some tips to go from renter to buyer. But we're keen to acknowledge that a year of falling prices doesn't quite make up for five years of rising prices.
Nevertheless, first home buyers in most Australian cities are in a much better position now than they were in 2017 (unless you're buying in Hobart).
Here are seven tips to help you get into the market faster.
1. Take a second look at the market
When was the last time you really looked at property prices? A lot has changed. If you've given up the search and resigned yourself to renting, you could be surprised to see what prices look like now in areas you considered before.
Make sure you look at recent sold properties rather than just current listings. Actual selling prices are the strongest piece of information you need because they give you a far more accurate idea of current prices.
2. Crunch the numbers again
Once you've got a better idea of current property prices, you should work out how much mortgage repayments will cost you.
Take some example properties, work out how much you have for a deposit and use a loan repayment calculator to estimate your monthly repayments.
If you can find similar properties to the one you're currently renting, the comparison could be very worthwhile.
I recently looked at current selling prices for identical apartments in my building and was shocked to find the asking prices worked out to mortgage repayments almost $100 a week cheaper than my rent!
Lenders are stricter about giving out mortgages now in the wake of the royal commission. So you'll need to make sure your finances are in tight shape.
Go back over your finances, income and expenses and work out what your borrowing power is. This is important because your salary, lifestyle and spending habits may have changed.
Work out if there are ways you can trim your expenses and consider getting a free credit score.
3. Scrape together a 5% deposit
You don't need a 20% deposit to get a mortgage. The huge deposit size is a major burden for renters looking to buy. But you can find plenty of mortgages that let you borrow up to 95%.
This means you can buy sooner rather than later. The downside is you'll probably have to pay lenders mortgage insurance if your deposit is less than 20%. This can add a lot to your costs. Plus a smaller deposit means borrowing more money and therefore paying more interest. And if prices continue to fall you might end up with negative equity (having a mortgage debt bigger than the property's value).
4. Get a parental guarantor (if you can)
If you have a parent who owns a property and has paid most or all of it off, they could help you out by guaranteeing part or all of your deposit.
Your mortgage guarantor doesn't pay a cent. Instead they guarantee a portion of your deposit, meaning they agree to pay it back if you can't.
Here's an example: You save up a 5% deposit and your parents agree to guarantee 15% more. This amounts to a 20% deposit. But the bank will need to lend you 95% of the property's value. The benefit is you can avoid lenders mortgage insurance and your application looks stronger. Your parents don't pay anything, but they agree to pay 15% of the loan if you can't repay it.
This is what makes the guarantor option somewhat risky. And it certainly isn't an option for every buyer.
5. Rentvest in a cheaper suburb or state
Rentvesting, like the word itself, is a slightly awkward but convenient combination of renting and investing.
You rent where you want to live and buy where you can afford. The property you buy becomes an investment property , and you rent it out to cover the mortgage repayments.
It's a little complicated, and really requires some research. But it's a strategy that allows renters in expensive areas to buy property in more affordable areas.
6. Expand your horizons
Property can be an emotional purchase. It's important not to get too hung up on particular suburbs or property types. Be willing to look beyond your preferred areas to slightly cheaper suburbs or re-evaluate the type of property you're looking at.
This could be choosing a townhouse over a free-standing house or looking at suburbs in a 10-minute radius from the one you really like.
This willingness to expand your horizons could even get you a much better deal now with prices where they are now.
7. If you do buy, get organised
It's a buyer's market, but the most organised buyer will always have the advantage. Make sure you do the following to ensure you are as organised as possible:
- Research the market. If you have a really clear idea of property prices, you can make a better decision, negotiate hard and avoid paying too much.
- Get mortgage pre-approval. The smart buyer always comes to an auction pre-approved by a lender. This indicates you're serious and gives you a stronger idea of how much you can actually borrow.
- Sort your finances in advance. Lenders are getting stricter about lending. Experts we spoke to suggest that lenders now scrutinise the past six months of your spending. A mortgage broker can help get your finances organised.
- Consider using a buyer's agent. A professional buyer's agent can help you make a better decision and negotiate a good price.
With prices dropping and plenty of sellers listing properties, strong and well-organised buyers are well placed to get good deals.
- How much will a reverse mortgage cost you?
- Planning your retirement? Here are 4 things you need to know about reverse mortgages
- Home buyers with low deposits can save thousands in LMI premiums with these lenders
- How will proposed “simpler credit” rules affect Australian borrowers?
- Borrowers are back: homebuyer lending rises 10% in July