For some younger Australians, the possibility of being locked out of the country’s housing market is as much a fear as it is an opportunity.
A growing gulf between housing prices and wage growth has inspired many to jump into the market no matter the cost. However, some experts say that desperate rush into the market by younger investors has seen many mistakes made along the way.
Speaking to nestegg, personal finance expert and Life Sherpa CEO Vince Scully said that one of the conventional wisdom around property investment has quickly become one of the bigger misconceptions among younger Australian investors.
According to him, most people who get into financial strife have either bought too much house or too much car.
“Getting the right amount of house is the number one step where most people get carried away,” he said.
Mr Scully said that in the early ’80s, buying the biggest house you can afford was generally the way to go because inflation would cover the cost sooner rather than later. However, he said that the same advice doesn’t necessarily make the most sense in today’s market.
But how should younger Australians determine what the right amount of house looks like? Mr Scully advised them to look at what they can buy for around five-to-six times their income or four-to-five times their income, if they’re on a lower wage.
“If you overdo it, you’re going to have to spend a lot of time cutting back,” he warned.
The second misconception that younger Australians have about home loans, he said, is the belief that they need a 20 per cent deposit.
Mr Scully argued that in a rising property market, lender’s mortgage insurance isn’t as big of a deal as people think it is.
Asked what young Australians should be looking for in their home loan provider, Mr Scully warned them not to focus too much on big-ticket things like price or rate. He suggested that they think more about the ways in which their income might be non-standard.
“If you depend on commission or bonuses or casual income or if you’ve got some income outside your job or you’re self-employed, the bank’s policies around how they assess that income in determining how much they’ll lend you is actually much more important than the rate,” he said.
“Very little of this policy information is made public,” Mr Scully added.
“How long is it going to take them to give you an approval, and is the pre-approval they’re going to give you an actual assessment or is it just plugged into a calculator? Those three things are way more important than the price or the colour of the credit car you’re going to get.”