With the current residential property market pushing home affordability further out of reach, many prospective homebuyers are looking for more creative ways to finance a home purchase. Recent data from the Australian Bureau of Statistics shows first home owner investment in the West Australian property market is going into further decline.
According to reiwa.com, ‘First home buyer loans fell by another 4 percent, down 13 percent since October last year to just 983 new applications in January of this year, (while) lending finance in January for investment properties was down by 8.7 percent on October and down by almost 25 percent on July 2006.’
This reduction is due to a range of issues. The property boom we are just coming off has sent prices beyond the reach of many. And while high rates of stamp duty have not helped this, there is some good news on the horizon, with the expectation that Treasurer Eric Ripper will announce tax relief for first homebuyers in the May State budget. In turn this has caused a drop in the supply of rental properties due to investor uncertainty in the market; along with a rise in the number of prospective tenants due to more first homebuyers being unable to afford mortgages. Interest rates have also had an effect, with a February Fujitsu/JPMorgan Australian Mortgage Industry Survey finding that 23 percent of respondents had been forced to cut household spending as a result of last year’s interest rate rises.
This has called the feasibility of home ownership into question for many lower-income earners, who are looking to other options for breaking out of the rental market.
The options for financing a new home purchase are continuing to expand as the financial institutions become more creative with their products on offer. One trend that is growing in momentum in the eastern states is that of pooling resources with friends or family in shared mortgages.
This type of investment has its pros and cons. Due to the potential unreliability of friendships – particularly under financial stress – the cons often hold more weight. However, with a clear head (and a clear contractual agreement), group ownership can be a worthwhile option for those who would otherwise be unable to afford a property.
For many young people, who get married or settle down later on in life, group ownership is a practical solution to buying house and land packages in new development suburbs, often at the sacrifice of lifestyle. In the currently uncertain climate, a group purchase in the inner city could be a more sound investment to the more volatile markets of the outer suburbs.
An issue to consider when entering into such an investment is whether to list as ‘joint tenants’ or ‘tenants in common’. Under a joint tenancy, if one owner dies, their share of the investment automatically goes to the other tenant. However, a ‘tenant in common’ arrangement would send the share to the deceased’s estate. It’s also important to consider whether all parties will be living in the premises, or only one or two. If so, how will the tenants reimburse the other party?
While joint ownership can lead to greater financial freedom, it must be subject to fairly thorough legal advice and contracts that set down courses of action for any eventuality. Parties must step back from emotional bonds and assess whether the relationship is reliable enough to go ahead with the arrangement.
Another option could be an ‘equity finance mortgage’, where a financial institution takes a share of the equity of your home in exchange for lower interest rate payments. These loans offer some protection against downturns in the market, but also offer less capital gain to the owner when the market does well.
Mara Bun of independent research group Cannex found that ‘in recent years home buyers in markets with modest or flat growth rates would have been better off using a shared equity loan, while buyers in high-growth markets would have done better financing their purchase with a standard mortgage only.’
With the West Australian property market slowing this year, more potential homebuyers will be considering such packages as a leg-up into the property market. While it can be difficult to decide whether an equity loan or a standard mortgage is the ‘right’ choice, the range of options should grow as the financial institutions adapt to the lack of affordability.
Zac Whitely
Rayner and Associates
Seeking financial planning and legal advice from qualified professionals is recommended when considering any kind of home loan.
