New angles on the affordability issue: Leanne Pilkington
GUSET OBSERVER
With property prices typically viewed as the crux of the affordability problem, and little able to be done on this score, new ideas are needed to open the door to first home buyers - and targeting up-front costs is the place to start.
While much has been written about the huge burden of stamp duty, particularly in NSW, Ms Pilkington nominates mortgage insurance as an area that could also be addressed to give first home buyers a more realistic chance of entering the market.
Enabling first home buyers to negatively gear a percentage of their mortgage – even just a small one – is another opportunity to address affordability.
A 10 percent deposit on a Sydney property is a significant amount of money but when you factor in mortgage insurance, legal costs and initial home insurance, on top of the exorbitant cost of stamp duty, it’s no surprise so many first home buyers are disheartened.
The various up-front costs mean the numbers fail to add up for many first home buyers. It’s at this point the excitement dissipates and stress takes over, and many looking to enter the market simply bow out, assuming they’ll never have enough.
That’s why it’s at this point we need to help first buyers navigate a successful purchase.
Mortgage insurance is an important safeguard but questions the methodology of paying an up-front one-off lump sum.
Most insurance policies are paid annually on an as-needed basis. There is no reason this couldn’t be applied to mortgage insurance too.
One Laing+Simmons franchisee was recently working with a customer who had to pay over $8,000 in mortgage insurance up-front as they only had a 10 percent deposit. The property subsequently rose in value by 10% over the next six months, meaning their equity was now 20% and they therefore had no further need for mortgage insurance.
Yet they had already incurred the cost - a cost that could, and should, be avoided.
The number of times an insurance company has to pay out on mortgage insurance is not in line with the amount they charge.
Aside from a fairer approach to mortgage insurance, Ms Pilkington says Governments could also explore how negative gearing could help first home buyers.
Under certain conditions, perhaps we could enable first home buyers to access negative gearing on the home they live in, even if it was only for a small percentage of their mortgage.
For example, first home buyers might negative gear a percentage of their loan for a fixed period of time which would lower repayments and, like any property negatively geared, the Government could claim some sort of capital gains tax when they sell.
Any options to improve the tax effectiveness for home ownership to support first home buyers could be considered.
Leanne Pilkington is managing director, Laing+Simmons and can be contacted here.
