Over the past few years, innovative mortgages and lower deposit requirements have helped first home buyers back into the market. Although some new products are more costly and risky for borrowers, and credit requirements may tighten due to the global credit crisis, more first home buyers are expected to climb the property ladder.
First home buyers have returned to the market in the last three years
In 2003, first home buyer participation in the Australian mortgage market hit a low point, with first home buyers accounting for only 13.7% of lending commitments to owner-occupiers, or A$17.1 billion. Meanwhile, the Australian investment property market was experiencing a boom, and in many cases first home buyers were priced out of the market. Since then, house price growth has been much slower, allowing an increasing number of first home buyers to take out mortgages.
In 2006, first home buyers took out A$29.2 billion of mortgages, or 17.7% of total owner-occupier lending commitments. It is expected that first home buyers will pursue their return to the Australian mortgage market, accounting for A$45.9 billion in 2011, or 20.5% of total owner-occupier lending commitments.
Innovative mortgages have helped first home buyers get back into the market
First home buyers have been helped back into the mortgage market by innovations in the mortgage industry, although most customers still prefer to take out traditional mortgage products. Mortgages requiring little or no deposit have become more common, and the average loan-to-valuation ratio (LVR) of loans has risen. Family support products, where customers can use a family member's equity as additional security for a loan, have increased in popularity and are offered by all major banks. These products ameliorate the problem of raising a deposit, which has become more of an issue as rental costs have increased.
Shared equity products enter Australian mortgage market
Shared equity mortgages have been introduced into the Australian marketplace, with Adelaide Bank being the first private provider of such a product. The Adelaide Bank equity finance mortgage (EFM) provides funds for up to 20% of property value, and requires no repayments over the term of the loan. Instead, it claims up to 40% of capital gains of the property at the end of the loan.
Due to the complexity of the product and negative public perception of sharing eventual capital gains of a property, it is expected to take several years for shared equity mortgages to achieve traction in the Australian market. First home buyers with no alternative way into the property market are a prime target segment for this product.
The current affordability crisis will surely prompt further political discussions and initiatives. New forms of mortgages also have the potential to continue to aid first home buyers onto the property ladder. However, consumer advocates are concerned that some new products involve higher cost and risk for borrowers. Lenders must strike a delicate balance between helping people onto the property ladder and responsible lending.