Caution for first home buyers: it may be cheaper now but you’ll pay for it later!

First home buyers are being warned by Australia’s leading financial comparison website RateCity.com.au (RateCity) to be careful with taking on more debt, following a new Index into the first home buyer market.

RateCity’s First Home Buyer Affordability Index – Autumn 2013, decreased by eight points over the past year to March 2013, which means it’s now more affordable to enter the property market. 1

The RateCity Index measured the level of affordability for first home buyers based on average household incomes, average first home buyer loan sizes and the benchmark basic variable rates (the average of the major four banks). The cost of monthly repayments was then calculated, as well as the proportion of income towards repayments.

While lower interest rates was the biggest driver in reducing the cost of mortgage repayments over the past year, many first home buyers have been taking on more debt, according to RateCity.

The national average first home buyer loan size has increased from $281,800 in March 2012 to $291,200 in March 213.

But the drop in interest rates has outweighed higher mortgage debts, with the benchmark basic variable rate falling by 0.94 percentage points since March 2012. This has reduced the average proportion of income to repayments, from 28 percent in March 2012 to 25 percent in March 2013.

Michelle Hutchison, Spokesperson for RateCity, said she was concerned to see first home buyers taking on more debt.

“It’s easy to feel comfortable with a bigger mortgage when interest rates are low. But taking on more debt will end up escalating the cost when interest rates rise and borrowers can get into financial trouble if they are not careful.

“For instance, it costs an extra $108,716 in interest for a $400,000 home loan compared to a $300,000 home loan, based on the current benchmark basic variable rate of 5.69 percent.

“If interest rates increased by 1.00 percentage point to 6.69 percent, it would cost an extra $195 per month for a $300,000 mortgage but would cost an extra $259 per month for a $400,000 loan – that’s $65 more each month or over $700 in one year for the bigger loan size.

 

Total interest charged after 30 years at 5.69%

Monthly repayments at 5.69%

Monthly repayments at 6.69%

Difference in repayments 5.69% Vs. 6.69%

$300,000 home loan

$326,148

$1,739

$1,934

+$195

$400,000 home loan

$434,864

$2,319

$2,578

+$259

Difference

+$108,716

+$580

+$645

+$65

“During a home loan application process, most lenders will tell borrowers their maximum borrowing capacity, which is often more than they plan to borrow. Don’t let your lender tell you how much debt to take on, use the Home Loan calculator at RateCity.com.au and work out how much debt you can afford if interest rates rise,”

said Mrs Hutchison.

 

State by state comparison

Every state across Australia showed an improvement in affordability for first home buyers over the 12 months to March 2013.

Tasmania saw the biggest drop of 14 points in the RateCity First Home Buyer Affordability Index, followed by South Australia with a 12 point drop, and Victoria and Queensland both dropped by 11 points.

Northern Territory and the ACT both dropped by six points in the Index.[sam id=34 codes=’true’]

New South Wales and Western Australia saw the smallest fall in the Index, both dropping by five points. This was due to the biggest growth in average loan size compared to the other states for NSW, and second-biggest growth for WA. The NSW first home buyer average loan size increased by 7.4 percent or $21,700, to $315,400. While WA saw its average first home buyer loan size rise by 7.1 percent or $21,000, to $315,800.

Tasmania and South Australia were also the only two states to see first home buyers taking on less debt than 12 months prior. The TAS average first home buyer loan size fell by $6,300 to $217,500, and SA fell by $1,600 to $240,700.

 

ACT most affordable

According to the RateCity report, the ACT is the most affordable for first home buyers, with the smallest proportion of income towards repayments than other states. It costs ACT first home buyers 18 percent of their income towards mortgage repayments on average, due to ACT holding the highest average annual household income estimated to be $130,320.

NSW and Victorian first home buyers live in the most unaffordable state to buy a home, with 27 percent of their incomes go towards mortgage repayments.

However all average first home buyers in each state are below mortgage stress levels, which is when more than 30 percent of income goes towards mortgage repayments.

 

RateCity First Home Buyer Index – New South Wales results

Date

Household income (ABS: original)

NSW average FHB loan size

Benchmark basic variable rate

Repayments per month

% of income to repayments

Mar-12

$80,787

$293,700

6.69%

$1,892

28%

Mar-13

$82,564

$315,400

5.75%

$1,840

27%

DIFFERENCE

+$1,777

+$21,700

-0.94%

-$52

-1%

 

RateCity First Home Buyer Index – Victoria results

Date

Household income (ABS: original)

VIC average FHB loan size

Benchmark basic variable rate

Repayments per month

% of income to repayments

Mar-12

$69,763

$277,300

6.69%

$1,787

31%

Mar-13

$71,298

$280,000

5.75%

$1,634

27%

DIFFERENCE

+$1,535

+$2,700

-0.94%

-$153

-4%

 

RateCity First Home Buyer Index – Queensland results

Date

Household income (ABS: original)

QLD average FHB loan size

Benchmark basic variable rate

Repayments per month

% of income to repayments

Mar-12

$80,513

$276,200

6.69%

$1,779.51

27%

Mar-13

$82,284

$277,500

5.75%

$1,618.97

24%

DIFFERENCE

+$1,771

$1,300

-0.94%

-$161

-3%

 

RateCity First Home Buyer Index – South Australia results

Date

Household income (ABS: original)

SA average FHB loan size

Benchmark basic variable rate

Repayments per month

% of income to repayments

Mar-12

$67,624

$242,300

6.69%

$1,561

28%

Mar-13

$69,112

$240,700

5.75%

$1,404

24%

DIFFERENCE

+$1,488

-$1,600

-0.94%

-$157

-4%

 

RateCity First Home Buyer Index – Western Australia results

Date

Household income (ABS: original)

WA average FHB loan size

Benchmark basic variable rate

Repayments per month

% of income to repayments

Mar-12

$101,463

$294,800

6.69%

$1,899

22%

Mar-13

$103,696

$315,800

5.75%

$1,842

21%

DIFFERENCE

+$2,232

+$21,000

-0.94%

-$57

-1%

 

RateCity First Home Buyer Index – Tasmania results

Date

Household income (ABS: original)

TAS average FHB loan size

Benchmark basic variable rate

Repayments per month

% of income to repayments

Mar-12

$68,282

$223,800

6.69%

$1,442

25%

Mar-13

$69,784

$217,500

5.75%

$1,269

22%

DIFFERENCE

+$1,502

-$6,300

-0.94%

-$173

-3%

 

RateCity First Home Buyer Index – Northern Territory results

Date

Household income (ABS: original)

NT average FHB loan size

Benchmark basic variable rate

Repayments per month

% of income to repayments

Mar-12

$105,522

$303,600

6.69%

$1,956

22%

Mar-13

$107,843

$323,400

5.75%

$1,887

21%

DIFFERENCE

+$2,321

+$19,800

–0.94%

-$69

-1%

 

RateCity First Home Buyer Index – Australian Capital Territory results

Date

Household income (ABS: original)

ACT average FHB loan size

Benchmark basic variable rate

Repayments per month

% of income to repayments

Mar-12

$127,515

$309,900

6.69%

$1,997

19%

Mar-13

$130,320

$327,200

5.75%

$1,909

18%

DIFFERENCE

+$2,805

+$17,300

-0.94%

-$88

-1%

 [post_ender]

 



Want more of this type of information?


About

Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been once agin been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Caution for first home buyers: it may be cheaper now but you’ll pay for it later!' have no comments

Be the first to comment this post!

Would you like to share your thoughts?

Your email address will not be published.
CAPTCHA Image

*

0
0

Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...

REGISTER NOW

Subscribe!