Is it time to think outside the box to get on the property ladder?

Despite predictions of a slowdown in the growth of Australian property prices in 2017, the double-digit percentage increase in market values over the last year shows no real signs of easing.

The irony is that while the cash rate is at a record low, first time and low income buyers are still struggling to get a foot on the property ladder. As the average age of the typical first-home buyer looks set to rise, Aussie investigates a few alternative ways to get your slice of the Australian dream.

The average price of a home across all Australian capital cities is now over $500,000, and climbing. In fact, it’s grown by over 10% in at least half the capitals in the last year alone. This continued growth means the amount of cash you need for a 20% deposit has also jumped by 10%. Looking at the national average, you need almost $10,000 more for a 20% deposit than you did this time last year.

Compounding the challenge is the fact that growth in house prices hasn’t been matched by wages growth. With average yearly salaries stuck at around $80,000, it’s no wonder many potential first time buyers are struggling to find the cash they need to get a foot in the door.

But even if outright ownership of your dream home is out of reach today, there are a few alternative strategies that could at least get your toe on the ladder.

What if I start smaller?

While saving a 20% deposit for the home of your dreams may be a little out of reach right now, perhaps you’ve got some cash set aside that would cover a smaller deposit. It could be worth considering buying a more affordable investment property and building your equity to use down the track on a place you really do want to live.

Step away from the capital cities and average prices are lower. In NSW the regional average is almost half that of Sydney, and it’s the same story in regional Victoria compared to Melbourne. So even if you don’t have a large savings account right now, getting the cash together for a 20% deposit won’t take as long.

You can use rental returns to pay the mortgage and related costs, and if they don’t always cover it you could take advantage of the beneficial negative gearing provisions in Australia to get some tax breaks.

But keep in mind your objective is to build wealth so you can eventually afford a home where you want to live, so always being positively geared – i.e. earning more from the investment property than it costs to own it – could help get you that result sooner. Keep in mind, however, that you will also need to pay tax on any additional net income.

Should I buy with my mates?

Chipping in with one or more close friends or family members to get a foot on the property ladder can make sense, especially if you’re already renting together and know that you can get on. With costs and responsibilities split evenly, it could be a great first move into home ownership while the more serious concerns of life such as marriage and kids are still a few years off.

Like any legal partnership, it’s crucial to agree the details upfront. Here are few key things you should probably think about before you start packing:

• Be as vigilant as a bank when it comes to determining whether your mate can pay his or her share of the bills. You’ll need to get up close and personal with their finances including their credit score, income and assets. And you’ll need to be comfortable for them to do the same with yours.

• Make sure you’ve got an agreed contingency if any one of you can’t pay their share, whether it’s lining up for a quick sale or staging a buy out.

• Remember if you default on any of the mortgage payments it could affect each of the borrowers’ credit scores.

• Understand your legal position as a joint owner. It’s advisable to get legal advice to work out if a joint tenancy or tenancy-in-common is the best structure for your circumstances

• Even if all borrowers can afford it, keep in mind that being able to live together is about more than just paying the bills. Will their late-night parties interfere with your early morning yoga routine?

A co-ownership agreement that covers as many eventualities as possible can protect everyone’s interests and, potentially, save a lot of future heartache. Draft a few household guidelines while you’re at it to cover off things like housework and house guests. And set a few ground rules for regularly airing grievances so they don’t build up and eventually boil over.

Buying a property with friends or family is a big decision and it’s not an arrangement you can get out of in a hurry, but with a bit of forward thinking it could be a great way to start your climb up the property ladder sooner.

Can I get a part-ownership?

If buying with friends is not for you, there are other ways to build your stake in the property market through shared or part-ownership that could be worth considering.

If you’re lucky enough to live in Western Australia, you could take advantage of the Shared Home Ownership Scheme offered by the WA state government.

For as little as a $2000 deposit or 2% of the purchase price, the scheme enables the purchase of a newly built off the plan property using a state government loan. The government retains part ownership of the home but you have the option to buy and sell when you please, and eventually own the property outright.

Outside of WA, initiatives such as BRICKX let you build an investment portfolio of individual bricks and take a share in any capital gain or rental return on the properties of the bricks you purchase.

While it’s technically shared ownership, BRICKX is not going to give you a place to live in, and you don’t get to choose the property. But it could provide the opportunity to build your wealth for a bigger deposit down the track with your share of any capital growth and rental income.

As with any investment portfolio there are fees involved, so do your sums to see how much your portfolio would need to generate to make it a worthwhile investment.

What about the bank of Mum and Dad?

If you’re thinking about asking your mum and dad to help you buy a home, you’re not alone. The number of first home buyers getting help from their parents is on the rise, with the proportion of parent-assisted property purchases doubling since the 1970s.

A family pledge loan uses the existing equity in a family member’s home as security, reducing the amount of cash you might need as a deposit. The guaranteed portion can be limited to the value of a 20% deposit which means your guarantor doesn’t have to offer their entire home as security.

Access to this kind of loan is limited to immediate family so it does rely on one of your close relatives owning a house with enough equity to cover it.

A family guarantee could get you into your own place sooner since you’ll be able to access finance with a lower cash deposit. If you’re a first-time buyer you’ll also still be eligible for the First Home Owners Grant.

The flip side, of course, is that you’re putting the home of a family member on the line if you default on loan repayments. But if it’s the size of deposit not the on-going repayments that are the real barrier for you then this could be an option worth considering.

Saving a deposit for your first home can be a challenge when house prices are on the rise, but there are alternative ways of getting onto the property ladder. Talk to your Aussie broker today about finding the right home loan that will work for you.

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