“With property prices rising, should I wait a few years to buy a home and hope prices fall. In the meantime, how can I grow my current house deposit through other investments?”
-Question from Jacob in Southport, QLD
Top answer provided by:
Lyle Filer
Hey Jacob, these are great questions to be asking as house prices seem to be continuing to increase rapidly. The “fear of missing out” (FOMO) is making it difficult to find the right property for the right price, which is driven by a reduction in supply along with an increased demand plus reduced borrowing costs.
At the start of COVID, the Big 4 banks were predicting that property prices would fall up to 32%, yet prices have boomed. Now they are forecasting increases of up 18.5% over the next couple of years. If you are to trust the predictions of the banks, this suggests it might be a good time to get your foot in the door before prices increase further. In the case, your biggest question would be - can you rely on these predictions?
My advice for anyone looking to buy their first home while they are renting is:
- Create a relationship with a mortgage broker - they will be able to provide an idea of your borrowing power and what your ongoing costs will be. Sometimes owning your own home is cheaper than renting, which is something else to consider. Also, you may be entitled to the first home loan deposit scheme. Check out the government's support to buy a home page.
- Take your time while looking for the property that is right for you, that fits within your budget and ticks your boxes.
- Try not to get caught up in FOMO - just because someone else wants the property too doesn’t mean you need to overspend and therefore over-commit yourself.
- In this market make sure you have your 20% deposit. Lenders Mortgage Insurance (“LMI”) is not really insurance, it is an extra charge for not having a 20% deposit. If you have the ability to save, it’s worth taking the time to have sufficient funds for a deposit to avoid paying this.
- Do your research - too many times have I seen families that have bought properties that end up being money pits.
If you are predicting that the market will drop in the next few years, and we assume it is worth waiting, there are a few things you could do to help to grow your deposit:
- Invest your deposit - I would suggest avoiding anything that is high risk because you are looking to use the money in the next few years, so anything that has the potential for your capital to drop would be unwise for such a short-term investment. I would suggest sitting down with a financial adviser to help you choose the right thing.
- FHSSS - this is a great scheme and can help you to build up your deposit in a tax efficient way I use this scheme for a lot of my clients, check out this site for more information
- Budget – going through your budget and working out how much extra you can put aside will help a lot plus you might find you are spending money on things you don’t need.
- Start to prepare now for your mortgage application – look at your situation. For example, if you have any ‘buy now pay later’ debts like After Pay and Zip pay, pat them out and cancel them. These impact your affordability as the weekly amount’s payable are treated as if you have them for the life of the house loan.
Essentially the two professionals I recommend you go and see are a financial adviser and mortgage broker. Prior planning creates the best results and predicting what the market will do at this point is anyone’s guess. Don’t buy into FOMO and I am sure you will make a decision that is right for your situation with the right planning.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
Article by:
Comments3
"Hey Greg, I agree LMI can be useful when you are having trouble getting enough of a deposit and if you are predicting house prices are going to increase. But in this market when everyone is mixed about the prices going up or down, if you are predicting the prices to go down then potentially the opposite to your scenario will happen and you will have had a capital loss and paid for something that gave you no benefit. My position is try to avoid LMI, but it is there and should be used in the right situation. Advice should always be sort, before making big decisions rather than having any blanket rules for yourself."
Lyle 10:01 on 09 Oct 21
"Not so sure about the advice to avoid LMI. The time it takes to save the extra $50,000 - $80,000 needed to get you to a 20% deposit plus stamp duty & other costs could see your property increase by $100,000, so you're forever chasing your tail. While LMI is seen as an insurance policy that benefits the bank only, if it allows you to buy now instead of 12-24 months down the track and you make $100,000 or more on the purchase in that time, then it's been a real benefit to you as well. I'd call that a win. "
Greg 16:01 on 06 Oct 21
"There is no one Australian property market and the Gold Coast market is currently going through one of the biggest bubbles it has ever gone through, and it has had plenty in the past. The last anywhere near this was about 2002 / 2003 with a key factor being whether all the people from Victoria and Sydney can get work on the Gold Coast or be able to work remotely once COVID settles down. Not a straight answer but personally I wouldn't employ any of them."
Scott 15:49 on 06 Oct 21