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Why first-time buyers are finding it harder to get a mortgage
By John Collett
First home buyers are more likely to be turned down by a lender than they were two years ago, as higher interest rates and higher rents – among other factors – make it harder to get on to the housing ladder.
Figures from credit bureau Equifax show the “success” rate – the portion of applications that result in a mortgage – for 25- to 44-year-olds, many of whom are first home buyers, in the first quarter of this year was between 50 and 60 per cent.
It is not likely to get any easier to own the roof over your head until interest rates start coming down.Credit: Wayne Taylor
A little under two years ago, the success rate was 70 to 80 per cent, with surging rents and the higher cost of servicing a mortgage among the biggest factors making it harder to get onto the property ladder, says Melanie Cochrane, chief executive of Equifax Australia and New Zealand.
She says the figures include those who are approved for a mortgage but do not proceed, but that the broader trend of rejections is clear in the data and will likely continue until interest rates start to fall.
“The cost of servicing a mortgage has increased over the past two years, which is making it more difficult to get onto the property ladder; the deterioration of the success rate is an indication of that,” Cochrane says.
She says soaring rents are also likely to be driving the trend, as it affects the ability of those looking to get their first home to save a deposit.
The Reserve Bank of Australia started increasing interest rates in early May 2022, lifting the cash rate from 0.1 per cent to 4.35 per cent as it tries to bring inflation to within its target of 2 to 3 per cent.
Inflation was 4 per cent for the year to May 31, and our central bank could increase the cash rate when it next meets in early August.
For many first home buyers, it is the deposit that is the biggest hurdle. The federal government’s low deposit schemes, which are designed to help those with less than 20 per cent deposit to get a mortgage, will add 50,000 more places for eligible home buyers this financial year.
During this financial year, 35,000 new places will be available in the First Home Guarantee; 10,000 places for the Regional First Home Buyer Guarantee and 5000 places for the Family Home Guarantee.
There are salary limits for the schemes as well as caps on purchase prices, which vary depending on the location of the property.
The bank of mum and dad can be another way for those struggling to get a start on the property market, at least for those lucky enough to have parents willing to help and in a financial position to do so.
Many adult children would likely prefer part of their inheritance given to them early when it would be most useful to them.
A research paper released by the Productivity Commission in late 2021 said recipients of inheritances were well into middle age, close to their peak earning capacity and most of them were already home owners.
Sarah Megginson, personal finance expert at Finder, says early inheritance can help to drastically improve the lives of children, such as using the money for a deposit on a home or investing in education.
However, it is not a decision that should be made without some serious consideration of the parents’ future financial needs, she says.
A survey conducted of investors on behalf of investment platform Stake found that many of the parents among those surveyed have helped their children to buy a home.
However, some said helping their children had limited their ability to travel, or to save or invest, or had delayed their retirement.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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