If you’ve been scrimping and squirrelling away money in the hopes of getting a foot on the property ladder, you’re probably pretty conflicted right now.
News just in is that the average Aussie can now borrow $195,500 less than only six months ago.
While in May, a double-income household with a $150,000 gross annual income might have qualified for a home loan of $995,800, RateCity calculations show that has shrunk 20 per cent to $800,300.
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Which makes it easy to feel a little ‘purchase panicked’.
But the flipside is that the current Reserve Bank of Australia (RBA) hike-cycle is pushing property prices down… and there is also danger in buying too soon and immediately losing money.
So, here are my three golden rules, and how to play the new property game, for safe borrowing.
Safe borrowing benchmark one: A (more-affordable-every-day) 20 per cent deposit
National Australia Bank (NAB) has just come out with some scary property forecasts. It is saying that falls will accelerate next year to reach a total 22.3 per cent in Sydney.
That would mean a typical retraction of up to $300,000 in that market; in Melbourne it’s predicting more than $200,000 - 23.2 per cent lower - by the end of 2023.
This is off the back, of course, of 250 basis points of official interest rate rises since May.
Note, though, that the pace is slowing and the market is still expecting the cash rate to begin coming down from the middle of next year.
In any case, property price falls are far from ideal once you are in a home of your own.
And the way to protect from them, if it’s not too late, is to build a big enough buffer prior to this.
We are talking about your deposit.
It has always been ideal to accumulate a 20 per cent deposit first but safety considerations today make this even more desirable.
This gives you a ‘buffer’ that protects you from what is called negative equity - owing more than the value of your property.
There are also two added bonuses of a 20 per cent deposit.
You avoid extortionate lenders’ mortgage insurance, which can set you back an extra tens of thousands of wasted dollars. Remember, this insurance does nothing more than protect the bank if you default and it doesn’t recoup the full value of your loan.
20 per cent is better is that it unlocks interest-rate discounts available to people with this amount or more equity (there are 261 basis points between the biggest and best mortgage rates).
And here is a Eureka realisation: The value of your property is only on paper until you sell it…
Buyers now have far more power to negotiate a better price. And even if the value subsequently falls, provided you never become a forced seller because you are unable to make your repayments, you can ride out the retraction.
So, how do you make sure you are not borrowing - and repaying - too much regardless.
Safe borrowing benchmark two: Get out of harm’s way of the RBA
The very good news is that the next safety strategy, one I have been advocating for many years, is now required by the regulator.
To get approved for a loan you will have to pass what is called a serviceability test.
And it’s strict.
They will take a forensics look at your income and every expense in the previous three months in particular to determine if there is enough fat in your finances to meet potential new mortgage repayments.
But they won’t stop there… and here is where the vital stress test comes in.
The Australian Prudential Regulation Authority needs a 300 basis point stress test on the prevailing interest rate.
Yep, they want banks to check you could still afford it if rates went up from here, another 12 times.
It’s punitive but it protects you.
Also, that this has been the rule for almost a year now means recent borrowers should not yet be too stretched - or stressed.
Safe borrowing benchmark three: Apply the 30 per cent rule
Housing stress is defined as the cost of the roof over your head sucking up more than 30 per cent of your gross household income.
That’s whether renting or repaying a mortgage.
(And the unfortunate reality is that through-the-roof rents make it harder for aspiring first homebuyers to build their deposit.)
Before you borrow, it’s important to make that calculation yourself based on your possible repayments at loan settlement.
But don’t stop there – apply your own DIY stress test and check whether 300 basis points of rises from there would put you over that 30 per cent stress threshold.
If you are confident of a pay rise sometime soon, perhaps you would be comfortable borrowing that amount anyway.
If you are not, you might want to look - for the sake of your future financial security - at properties worth a little less.
For first homebuyers, the name of the game right now is safety.
But there are also, increasingly, opportunities to get your real estate start.