Five Strategies for Young Australians to Enter the Property Market

If you’ve been keeping up with the news lately, you might have come across some extremely depressing stories with headlines like “Thought it was hard enough to buy a home? It just got worse” and “A Sydney home deposit now means skipping avo on toast for eight years, research says”.  

The first story (from The Age and the Sydney Morning Herald) looked at the figures from the ANZ CoreLogic Housing Affordability Report for November. 

The conclusion was “it would take 10 years for the median household to save up a 20 per cent deposit on the median Australian home.”

And it included this graph, which shows how median home values in Australia are moving into a range where it’s becoming harder to avoid “mortgage stress”   

The second story from ABC looked at new research from the property exchange business PEXA.

“Its analysis shows the time taken to save for a deposit in NSW has nearly doubled to almost eight years today, compared to slightly more than four years in 2020”, the ABC’s David Taylor wrote.

Those figures are based on an average deposit of about 17%.

For Victorian buyers, it was just over 5 years, and for Queensland buyers, it took just under 5 years to save the average home deposit in that state. 

All this paints a pretty gloomy picture if you are a young person who aspires to the Australian dream of owning your own home.

But what if I told you that if you are young, there are still plenty of opportunities to get a foot on the property ladder?

You will need to do your own homework and due diligence, but here are five easy strategies:  

“Loans” from Family and Relatives

We hear a lot about younger people who do manage to get into the property market by getting help from the “Bank of Mum and Dad”.

That’s great if you have parents or older relatives with plenty of cash to splash around.

But not everyone’s relatives are rolling in it, and there can be unintended consequences if you do manage to talk them into getting your inheritance early. 

For example, if your parents or relatives are receiving the Aged Pension and they gift you more than $10,000 in a financial year or $30,000 over a period of five years, they could lose access to their Centrelink benefits. 

However, the government does not have a problem if they lend you a large sum of money (say, for a deposit on a home), even if you pay no interest.

Centrelink’s only proviso is that the loan should be documented for it to be considered genuine.

That means you might need to engage a solicitor to draw up a loan document.

Guarantor Support

Another strategy where you can borrow up to 100% of the cost of a home (essentially get a home loan without the need for a deposit that you may have to save years for) is through what’s called “guarantor support”.

A guarantor is someone, say a family member or a friend, who can help you secure a home loan by offering their own property as additional security for your loan.

As Australia’s biggest lender, the Commonwealth Bank, puts it, “By having someone else provide a guarantee, we may be able to lend to you in situations where you may not be able to secure the full loan amount by yourself.”

There are obvious risks here, particularly for the guarantor of your loan.

If you can’t make the repayments, they will have to pay back the entire loan amount plus interest - and this could mean they stand to lose their own home.

LMI or LDP

If you don’t have family or friends who will “loan” you the money for a deposit or go guarantor on your loan, Lender’s Mortgage Insurance (LMI) or a Low Deposit Premium (LDP) may be for you.

LMI is essentially a premium that's added to your home loan. 

The extra cost is based on the size of your deposit and how much you borrow. 

So the bigger your deposit, the lower the cost.

It’s essentially an insurance policy to protect the bank because, with a smaller deposit (usually, LMI kicks in for loans with less than a 20% deposit), you’ll need a bigger loan, and so pose a larger lending risk. 

A Low Deposit Premium works in a similar way.

Yes, it means you are paying more in the short term, but you can weigh this up against your ability to enter the property market sooner, stop paying rent for years more, and start building up equity in your own home.

Government-shared equity schemes 

To avoid the higher costs that come with small deposit loans that require Lender's Mortgage Insurance, there’s a growing number of government schemes that enable some home buyers to purchase properties with as little as a 2% deposit, in return for “shared equity”.

From next year, the Federal government will roll out a scheme that will allow 40,000 low-and middle-income families to get into the property market with small deposits.

Similar existing schemes are already in place in some states, including New South Wales, Victoria and Western Australia.

Under the Albanese government’s plan, the government would provide eligible families with what’s called an "equity contribution" of up to 40 per cent of the cost of a new home, or 30 per cent for existing homes.

The best part is that you won't need to pay rent on the stake owned by the government.

However, if you sell the property, you’ll have to pay the government back, plus their share of any capital gains. 

For example, if the government holds a 40 per cent share in the property, then it’s entitled to 40 per cent of the proceeds of the sale, including 40 per cent of any capital gains earned.

There are plenty of eligibility hoops for these schemes.

For the Federal government scheme: you must have enough money for a 2% deposit, you have to be an Australian citizen, you must earn less than $90,000 a year if you are single or $120,000 if you are a couple, you must live in the home and at the time of purchase, you can’t own any other property in Australia or overseas.

That’s a lot of rules, but this has the potential to give many lower-income people a first foothold in the property market.

As people build up the equity in their homes and their own wealth, they can also progressively “buy out” the government’s stake.

The main thing to me is these schemes are a very clear and public endorsement by governments - state and federal - that Australian residential property is a very safe, reliable and profitable investment.

Believe me, governments would not be getting involved in these schemes if they weren’t going to get their money back - with interest.

And finally, just because…. 

I have to admit this is my favourite strategy, as it means young Australians who aspire to get on the property ladder don’t have to rely on loans or guarantees from relatives, take out expensive mortgage insurance or need to worry about the intricacies of sharing ownership of your home with Anthony Albanese.

Here it is…

Just because you live in Sydney, doesn’t mean you have to own a property in Sydney.

Ditto if you live in Melbourne or Brisbane.

You see, for what CoreLogic says is the price of a “median” house in Sydney ($1,396,888), you can own no less than three median-priced apartments in Perth ($450,905 each), each producing rent of more than $500 a week.

I’ve written more about “rentvesting” here: Rentvesting: What is it and is it a good idea?

But the main attraction of “rentvesting” for younger Australians is that in an expensive city like Sydney, they can still have exposure to the property market with all its associated capital growth, yet continue to rent close to family, friends and work, and enjoy all the inner city has to offer.

Sure, you are paying rent to someone else, but that is being offset (partially or totally) by the rent coming in from your tenant or tenants elsewhere.

What’s more, there are seriously attractive tax benefits in owning a rental property or properties, like negative gearing and CGT discounts, that make it an extremely effective way in which young Australians can build lasting wealth.

The wealth that you can use to buy all the smashed avocado on toast you like at that trendy inner-city cafe.

So enough of that gloom and doom talk!