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The surprise risk for first home buyers with low deposits


Rising rates, falling prices & low deposits make for a risky combo for new buyers, but they also represent an opportunity for those struggling to enter the market.

After a year of runaway property price growth, prices are finally slipping in Sydney and Melbourne. Other major cities are still growing, but property markets are definitely cooling down.

This is probably good news for first home buyers scrambling to save a deposit. But market conditions in 2022 bring new risks as well.

If property prices continue falling, and interest rates rise (as they almost certainly will), buyers with low deposits could find themselves making bigger mortgage repayments while their properties lose value.

And if you bought your property with a very low deposit, you could end up close to negative equity. This is when your debt outweighs the value of your property.

It's an unlikely scenario for most borrowers, but it could happen.

"There are certain dwelling types, locations and price-points that could be considered higher risk," property expert Cate Bakos told Finder. "But fortunately for those who usually enter the market with a low deposit, they are purchasing in a less expensive segment of the market.

"Lower-priced properties are less likely to sustain price falls than top quartile properties in our current market."

Is negative equity possible?

While the worst case scenario might not be something that will impact most borrowers, anyone buying in 2022 needs to be aware of the factors that make negative equity possible.

Interest rates have already started creeping up this year, and this will increase when the Reserve Bank lifts the cash rate target, as most experts predict it will in 2022.

Higher interest rates make loan repayments more expensive, putting further pressure on borrowers. And given that prices rose so much in 2021, many buyers now have to stretch themselves further and borrow more, with a lower deposit.

The lower your deposit, the less of your property you own at the start of your mortgage.

Buyers need to plan ahead for rising rates by saving up a buffer, and playing a longer game.

"A loss only exists on paper if it's not crystallised. If an owner finds themselves in negative equity territory, they can opt to ride out the storm by holding the property until the market conditions improve and the value eclipses their debt level," said Bakos.

"Buyers should also ask themselves if they'd consider it an opportune time to buy. For many months now, first home buyers have been waiting for a bit of a reprieve in terms of tough buying competition."

If prices do continue falling, a well-prepared buyer can snap a better deal. They just need to know the risks.

First home buyer? Compare competitive low deposit home loans from across the market.

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