Struggling to Get Ahead? What to Do If You Have No Mortgage Buffer

Despite the fact that we are living in a time of record low interest rates, it may not come as much of a surprise that many Australians are struggling to meet the repayments on their mortgage. While the situation may not be as serious as having to dip into emergency funds to pay the month’s home loan repayments, many Australian families are not far from it.

In a recent survey by Canstar, 43 percent of borrowers have fewer than three months’ worth of repayments saved up in the case that their financial situation changes dramatically. This could be something as simple as a termination of employment or medical emergency that would leave them with very little room to keep their home.

Even more alarming, around 15 percent of borrowers had no financial buffer whatsoever. They would be on the end of their leash and considering how unpredictable and volatile our current housing market is, particularly in the Eastern capitals, this proves to be a very dangerous situation for many Australian families.

In this article featured on Domain.com, the Canstar Consumer Pulse report also identified that 39 percent of homeowners had dipped into their financial buffer over the last 12 months. The conditions are growing frighteningly similar to those that preceded the global financial crisis leaving many to ask the question, what will happen next?

Just as important is to ask the question, “how did we get here?” While much of our housing growth is a result of the prosperity experienced during the mining boom, there is also the additional wave of investment internationally. Housing and property was seen as a safe bet once the mining industry slowed down and as with any investment boom, it can gather steam quite fast as more investors jump on the bandwagon. Those who have really felt the brunt of housing price growth have been first home buyers.

In the article, Steve Mickenbecker, executive of financial services for the Canstar group had expressed concerns that first home buyers were borrowing in a rapidly heating property market and taking advantage of interest only loans. This has only escalated property prices further and decreased the buffer that many first home buyers would set aside when paying off their mortgages as they scramble to take advantage of rising prices, continuing the cycle.

Mr. Mickenbecker pointed towards the alarming trend of many first home buyers being offered interest only loans that they couldn’t afford with many loan applications being inaccurate or misleading. Another interesting survey by UBS found that around one third of Australians were not completely truthful on their home loan application within the last 12 months.

The problem is not so much that we are borrowing more to keep up with the property market. Rather it is the fact that the property market has far outstripped our wages, they simply can’t keep up. This is a strong indication that many Australians are purchasing above their means simply to get a foothold in the property market, even if it may not serve their best interests in the long run.

What needs to happen, according to AMP Capital Chief Economist, Shane Oliver, is that there needs to be a significant reduction in unemployment as well as underemployment for our wages to start increasing. Further, Mr. Oliver mentioned that if there was to be a significant rise in unemployment, we could see some serious problems for the property market. This is considering the fact that the buffer for a majority of homeowners is as a little as three months, with many job seekers taking much longer than this period to secure employment.

What are the alternatives then? First home buyers are struggling to find their place in the property market and many want to live in a particular area that is not only good for employment but also a great place to raise a family. Many of these areas, close to transport and the city centers, are far too expensive to purchase in and while many try and make it work, the situation is far too volatile to be sustainable, especially during uncertain times in Australia’s economy in comparison to the rest of the world.

Let’s take a look at how adopting a rentvesting strategy could provide benefit to the situation first home buyers are currently finding themselves in. It would be safe to say that most first home buyers prefer to purchase in highly desirable areas, especially if they are planning on keeping this home for some time. What happens then is that these areas are often the most difficult to enter so it would seem logical to get in where you can, even if the loan is not exactly suited to the purchaser’s financial situation. The home buyer may then own the property, but they are heavily burdened with debt and even more alarming, if that home is on an interest only loan, they are essentially gambling on the fact property prices will continue to increase which is just not sustainable, especially for an owner occupier.

In our rentvesting scenario, the first home buyer can rent in a desirable area and reap the benefits, while paying significantly less. In areas where high growth in property prices has been experienced, oftentimes rental rates take a while to catch up, meaning the residents are paying far less than what they would, if they had purchased instead of rented.

Now, let’s say that through renting, they were able to keep that deposit and put it towards a home in an area that is poised for growth, one that fits with their financial situation as an investor. This property would then be rented to another family and the rental income would service the loan. Overtime, the property would continue to grow, and they are able to build a sizeable investment, as they continue to pay down the loan. Their lifestyle, at the rental property, is protected by the fact that they are not heavily burdened with a household debt, instead their debt is in an income producing asset.

If their situation was to change, such as unemployment or medical expenses, they would not be burdened by the fact they could potentially lose their home, their pride and joy as well as the most expensive purchase they have ever made. Even if they were unable to make their repayments, they can simply downsize or move to a more affordable area, while their investment continues to thrive, unaffected.

While this is a simplified example of what could potentially happen, it serves as a reminder that there are alternatives out there when it comes to purchasing property and in times such as these when wage growth is quite low in comparison to a strong property market, first home buyers need to consider their financial health and ability to repay their mortgage on homes that might be out of their reach. Instead, adopting an investors mindset and putting their money towards income producing assets might be the solution to keep them ahead of the market.

By |2018-03-06T04:41:27+00:00December 21st, 2017|

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