Kit Kadlec explains why buying now as a first homebuyer could save you money in the long run
The boost to the first home
Owner Grant (FHOG) has already been deemed a huge success, having been credited by property analysts for salvaging demand, confidence and even encouraging some price growth on the lower end.
There are many potential homebuyers who are still waiting on the sidelines, unsure about whether or not to jump in and buy a property. However, there is still a window of opportunity but it is limited.
The boost to the FHOG won’t last forever. At the time of this publication going to press, it was scheduled to finish on 30 June 2009. Whether that deadline holds or is extended by the government, once the definite last days of the boost come, there will be a final rush by first homebuyers unwilling to miss out.
One thing to remember, however, is that the 30 June expiration date is only for the FHOG boost, which was announced in October last year. The standard FHOG ($7,000 when buying an existing home and $14,000 when building or buying a new home) will continue after 30 June, whether or not the government decides to extend the boost. This means that first homebuyers will not miss out completely on the government grant. (See the table on pages 80–81.)
Impact of the grant
What is already clear is that the FHOG boost has had an impact in pushing up prices in the lower level of the market. John Edwards, CEO of Residex, says that is evidence the FHOG has already been absorbed into the sales price of many properties.
While the lower priced bracket has been hot lately, there is no guarantee it will remain that way once demand falls off. Edwards says he is also concerned about what would happen if those who buy a home using the FHOG then lose their job soon after.
With that in mind, it is important to keep a cool head and not rush into anything just because a deadline is approaching. Some prices at the lower level could already be inflated and buying a poorly placed or overvalued house could result in a net loss with the FHOG’s value. Becoming a home owner is not for someone who is not financially prepared.
But this is, nonetheless, an opportunity available for those Australians who’ve never owned a home – and it won’t last forever. It could open the door into what had seemed an impossible market just last year.
If you want to stop renting, you may find in some places it is cheaper to pay a mortgage on a home than to continue paying rent, which is in large part due to lowered interest rates. Even if it’s slightly more a week, fortnight or month, your future financial plans can be a lot stronger when your payments are going towards creating equity for yourself rather than lining your landlord’s pockets.
The QBE LMI Half Yearly Property Update shows that, by June 2009, the cost of renting in Sydney and Melbourne will be closer to the cost of paying off a median-priced house than at any other time in the past decade. The weekly median rents are more than 66% as a proportion of median home loan repayments .The ratio in Canberra, Brisbane and Perth is expected to approach 80%, and in Adelaide 75%.
“While there is significant uncertainty in relation to employment, an increasing number of first homebuyers who are confident about the future have decided the time is right to take advantage of government incentives, low interest rates and attractive housing prices,” says Ian Graham, chief executive officer of QBE LMI, a mortgage insurance provider. “The incentive for first homebuyers to enter the market has never been stronger.
The FHOG has helped first homebuyers to get over the deposit hurdle and is driving new lending enquiry/home loan approvals to record numbers.”
Grants made to first homeowners are not new in Australia, even a $7,000 grant has encouraged many buyers since 2000 in places such as Sydney’s western suburbs. But the government’s efforts since October last year are unique in many ways, especially in size, and require some close examination.
In order to qualify for this grant, applicants must be 18 years old or above, and at least one must be an Australian citizen or permanent resident. Just as important, no applicant may have owned any kind of property before July 2000, including one solely for investment. Since that point, applicants for the FHOG are allowed to have owned or held an interest in one investment property or more, given that they themselves did not ever live in these properties.
If you comply with these requirements, it’s likely you can qualify for the FHOG. What that entitles you to depends on what you want to purchase. If you buy an existing home, the FHOG entitles you to a total of $14,000. Those willing to look a bit further out from the CBD and either buy a new home off the plan or buy the land and have one built can receive $21,000 or more.
Investor or owner-occupier?
Another thing to consider is that you must live in this home for at least six months within 12 months of completing the transaction. Failing to do so could result in major fines, of more than $70,000 in some cases. But after the initial six-month period, owners are free to vacate the property and rent it out as an investment.
While this measure is geared towards those looking to own their first home, it also allows those who wish to become investors and can see this is a great time to purchase a home in what has been a buyers’ market.
“Combined with the sharp decrease in interest rates, for people who can meet the new tighter parameters on mortgage lending this presents a great time for investment,” says Justin Wang, Property Investors Alliance managing director and an advocate of investing in residential property as a means of wealth creation, rather than just buying a property as a home.
But even those looking to live in a property for a while should consider the longer term investment considerations, he says.
“For both new homebuyers and residential property investors alike, location is of even more critical concern than ever in buying a residential dwelling, especially during the current period of extreme volatility,” Wang adds.
“The first homebuyer should buy with future flexibility in mind for when they may want to change their home or use the first home to begin an investment portfolio.”
Who qualifies for the First Home Owner Boost?
The First Home Owner Boost Scheme, an Australian Government initiative, applies to contracts for homes dated between 14 October 2008 and 30 June 2009. For owner builders, construction must have commenced between those dates.
First homebuyers of an established home get an extra $7,000, while those purchasing or building a new home will get a further $14,000. These amounts are in addition to the existing $7,000 First Home Owner Grant, which was introduced on 1 July 2000 to offset the effect of GST on home ownership. Additional boosts specific to each state may apply as well.
The government defines a new home as “any home that has not been sold or occupied as a place of residence, including occupation by the builder, a tenant or other occupant”. A substantially renovated home can qualify, provided that it has not been occupied or sold as a place of residence since the completion of the renovations. “Substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or replaced,” the Queensland Government says on its website.
For those who signed a contract before 14 October 2008, there’s no easy way to wriggle into the boost. An owner cannot rescind a contract signed before that date then apply for the boosted FHOG by trying to purchase the same home or build the same or substantially similar home.
- Required living
Applicants are required to live in the purchased home within 12 months of its acquisition and for a minimum of six months. After that required period of living in the property, the owner can continue living there, decide to sell it or turn it into an investment property at no penalty.
Each applicant (including spouses and partners) must not have owned investment property before July 2000, and cannot have lived in any investment property as the owner since then. At least one applicant must be an Australian citizen or permanent resident, and applicants must be at least 18 years of age.
If you are caught in breach of any of the conditions after receiving the boosted FHOG, you could face severe fines. These could be double the value of the boosted FHOG you received and possibly even higher.
Breaking it down by state and territory
Each state and territory has its own local rules for the FHOG and boost. For example, the Northern Territory offers a boost to non-first homebuyers and NSW offers an additional $3,000 to first homebuyers who build a new home. Below are the details:
NEW SOUTH WALES
The First Home Plus scheme gives exemptions or concessions on stamp duty for first homebuyers, including vacant land on which you plan to build your home. The rule is that if your home is purchased for less than $500,000, you pay no stamp duty as a first homebuyer. This is one of the larger stamp duty concessions in the country. The following calculations take that into account, as well as the additional $3,000 to first homebuyers building a new home.
- Total savings on a $400,000 established home: $14,000 FHOG+ $13,490 stamp duty concession = $27,490
- Total savings without the government boost: $7,000 +$13,490 = $20,490
- Total savings on a $400,000 new home: $21,000 FHOG+ $3,000 NSW government grant + $13,490 stamp duty concession = $37,490
- Total savings without the FHOG boost: $14,000 + $3,000 +$13,490 = $30,490
Similarly to the situation in NSW, first homebuyers in Queensland pay no stamp duty on property valued up to $504,999. Otherwise, the FHOG follows the standard offering nationally.
- Total savings on a $400,000 established home: $14,000 FHOG+ $5,250 stamp duty concession = $19,250
- Total savings without the government boost: $7,000 + $5,250 = $12,250
- Total savings on a $400,000 new home: $21,000 FHOG+ $5,250 stamp duty concession = $26,250
- Total savings without the government boost: $14,000 + $5,250 = $19,250
In Victoria, a first homebuyer pays stamp duty, but does receive a First Home Bonus (FHB) of $3,000–$8,000. The latter figure applies to building a new home in a regional area.
- Total savings on a $400,000 established home: $14,000 FHOG+ $3,000 FHB = $17,000
- Total savings without government boost: $7,000 + $3,000 = $10,000
- Total savings on a $400,000 new home: $21,000 FHOG+ $5,000 FHB + $3,000 regional bonus = $29,000
- Total savings without government boost: $14,000 +$3,000 +$5,000 = $22,000
The basic FHOG is available in Western Australia, along with a stamp duty concession for properties valued up to $500,000. No other concessions are available.
- Total savings on a $400,000 established home: $14,000 FHOG+ $13,105 stamp duty concession = $27,105
- Total savings without government boost: $7,000 +13,105 = $20,105
- Total savings on a $400,000 new home: $21,000 FHOG+ $13,105 stamp duty concession = $34,105
- Total savings without government boost: $14,000 + $13,105 = $27,105
Australian Capital Territory
The ACT offers a slightly more complicated version of the stamp duty concession, requiring those applying to satisfy an income test. For example, a buyer with no children can’t earn more than $120,000 annually.
- Total savings on a $400,000 established home: $14,000 FHOG+ $15,000 stamp duty concession = $29,000
- Total savings without government boost: $7,000 +$15,000 = $22,000
- Total savings on a $400,000 new home: $21,000 FHOG+ $15,000 stamp duty concession = $36,000
- Total savings without the government boost: $14,000 + $15,000 = $29,000
In South Australia, first homebuyers can qualify for a $4,000 bonus if the property does not exceed $450,000. There is no stamp duty concession.
- Total savings on a $400,000 established home: $14,000 FHOG+ $4,000 bonus = $18,000
- Total savings without government boost: $7,000 + $4,000 = $11,000
- Total savings on a $400,000 new home: $21,000 FHOG+ $4,000 bonus = $25,000
- Total savings without government boost: $14,000 + $4,000 = $18,000
The rules are slightly different from the norm in Tasmania, where the median value is also lower. Thus, a $400,000 home doesn’t qualify for anything more than the standard boost, but a home purchased under $350,000 is eligible for up to $4,000 in stamp duty concessions.
- Total savings on a $350,000 established home: $14,000 FHOG+ up to $4,000 stamp duty concession = up to $18,000
- Total savings without government boost: $7,000
- Total savings on a $350,000 new home: $21,000 FHOG= $21,000
- Total savings without government boost: $14,000
Like Tasmania, first homebuyers in the Northern Territory who keep their purchase below a certain threshold, in this case $385,000, are eligible for a stamp duty concession. In the Northern Territory, that bonus equates to up to $15,515 savings on a $385,000 home.
- Total savings on a $385,000 established home: $14,000 FHOG= $14,000
- Total savings without government boost: $7,000
- Total savings on a $400,000 new home: $21,000 FHOG= $21,000
- Total savings without government boost: $14,000
NEED TO KNOW!
The existing First Home Owner Grant will not expire on 30 June, so first homebuyers can still get their hands on the $7,000 grant for existing properties and $14,000 for buying new dwellings after this date. The government placed an expiration date on the boost it announced in October 2008 but they are not terminating the First Home Owner Grant altogether.
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan