First home buyer debt burden: watch your budgets when entering property market!

First home buyers are being warned by Australia’s leading financial comparison website to take caution when entering the home loan market, or risk mortgage stress.

The warning follows research by RateCity which found first home buyers are taking on more debt on the back of steady growth in house prices over much of the past 15 years, despite recent slowing of the market.

The national average first home buyer mortgage size almost doubled in the past decade, to $297,100 in January 2013. In fact, first home buyers are taking on almost three-times more debt than they were 15 years ago, according to RateCity.

If the average first home buyer loan size kept in line with inflation only over the past 15 years, RateCity estimates first time borrowers are taking on a further $133,869 (or 82 percent) above the inflation adjusted average loan size*.

First home buyer debt burden: watch your budgets when entering property market!

Across the country, Tasmanian first home buyers saw the biggest jump in average home loan size since January 2003, by 154 percent. While looking back 15 years, ACT first home buyers had the biggest growth of average home loan size by 226 percent. While NSW has one of the biggest average first home buyer loan sizes, its growth was the slowest.

Michelle Hutchison, Spokesperson for RateCity, said that while there are good opportunities to enter the home loan market this year, first home buyers need to be cautious about taking on too much debt.

“Australia’s property market is looking positive for first home buyers with record low interest rates making home ownership more affordable and luring some buyers out of the woodwork.

“For instance, variable home loans are starting at 4.99 percent (by State Custodians) in RateCity’s database, which would cost $1,598 in monthly repayments for the average first home buyer loan size of $297,100.

“While prospective home buyers are starting to enter the property market, borrowers need to be careful about how much debt they can afford to take on.

“Over the past 20 years, the average variable home loan rate has been 7.25 percent (based on Reserve Bank data) While a $297,100 debt might be affordable now at 4.99 percent, if interest rates were to rise to 7 percent, that will cost an extra $384 in monthly repayments.”

Mrs Hutchison said borrowers need to be mindful that interest rates go up and down over time when setting their home loan budget or risk financial stress. RateCity’s loans comparisons and repayment calculators can help potential borrowers get a great understanding of their limits and capabilities.

“Good auction clearance results last weekend are likely to continue with more first home buyers expected to hit the property market this Easter long weekend. But before you start bidding, make sure you’re set with the right information and stick to your budget otherwise you could find yourself in real financial trouble if you’re not prepared for the possibility of higher interest rates.

“The last time interest rates began to increase in mid-2009, Fitch Ratings recorded a rise in late-paying home loans of more than 30 days, particularly for low-doc loans. Falling behind on your home loan can not only be detrimental to future loan applications but can also be costly, with lenders charging up to $150 in arrears fees.

“Borrowers should use RateCity to find good value home loan deals, and use the home loan calculator to help you work out how much you can afford to borrow.”


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