First home buyers are increasingly turning to credit cards and personal loans to boost their home deposit in a bid to get into the property market sooner.
There’s an air of desperation among many people trying to get into the market, Digital Finance Analytics principal Martin North says.
“As they see house prices continuing to rise and obviously interest rates are still very low, they feel that if they don’t get on the train now, they’ll never get on the train, so they’ll do almost anything to try and find a way to get into the property market,” Mr North says.
Lenders mortgage insurance provider Genworth’s chief commercial officer Bridget Sakr says people are reducing the time required to get to the standard 20 per cent deposit mark by looking at alternate sources.
“Rather than waiting and saving they’re looking for ways to as much as they can bridge that gap and get in earlier rather than later to try and capitalise on any housing market growth that they can see coming through.
“There is a lack of awareness in the marketplace that you don’t necessarily need to go and get a credit card or a personal loan for your deposit, there are other means such as lenders mortgage insurance.”
Mortgage broker Mortgage Choice spokeswoman Jessica Darnbrough says it is not surprising that first home buyers are using credit cards and personal loans to boost their deposits, given increased property prices mean bigger deposits and lenders are being more cautious about lending at high loan-to-valuation ratios.
She cautions that they should consider the much higher interest rates that apply to credit cards and personal loans compared to mortgages, and remember they will still have to pay off that debt.
“It’s just really important for first home buyers to do their sums first and foremost before making any decisions because it might seem clever but it may be more expensive in the long run, it really depends on your unique set of circumstances.”
Ms Darnbrough says there can be a stigma around lenders mortgage insurance, but it can help people get on to the property ladder sooner rather than later.
Ms Sakr says the reliance on other sources of debt to fund deposits may explain why first home buyers are now more likely to be heavily indebted.
Digital Finance Analytics’ surveys show the proportion of households in some degree of mortgage stress has risen to about 35 per cent and Mr North estimates about half of first home buyers would get into difficulty once rates start rising.
“As soon as it starts moving up those highly geared households who are at the moment under considerable difficulty just managing their debt portfolio will find it considerably harder to make those repayments,” he says.
He also cautions that the desperation to get into the property market is predicated on ongoing capital appreciation, saying there are enough negative economic indicators to suggest the property market “has ultimately done most of its dash”.
“Therefore people going into the market at the relatively peak point in the cycle should be very, very careful about overcommitting themselves to big credit card debts as well. “I think they’re setting themselves up for a fall.”
USE OF ALTERNATE SOURCES FOR HOME DEPOSIT ON THE RISE
* 74.1 pct have less than 20 pct deposit in savings
* 51 pct source money for deposit from savings (66 pct in 2014, 72 pct in 2013)
* 19 pct used credit cards (3 pct in 2013)
* 18 pct used personal loans (8 pct in 2013)
* FHB more likely to be heavily indebted (35 pct versus average of 23 pct)
* 21 pct of FHB experienced mortgage stress (9 pct in March 2015)
* 14 pct expect mortgage stress (8 pct in March 2015)
Source: Genworth, Mortgage Choice.