As city property prices continue to soar, it’s becoming more difficult for first home buyers to enter the market.

‘According to recent Australian Bureau of Statistics figures and assuming a loan to value ratio of 90 per cent, the average Australian first-time buyer is paying $395,222 for their first property and borrowing $355,700,’ property and financial commentator Peter Boehm says.

‘Assuming an interest rate of 5 per cent and a 25-year term, this equates to $2080 per month in mortgage payments.’

It’s not all bad news, however. We asked our expert panel to weigh in on the most frequently asked (and heavily debated) buying questions, revealing some surprising responses.

Expert panel

Q: Is it better to buy an established home or off-the-plan property?

Singh: For first home buyers, buying off the plan may be a more attractive choice as all states (except for Tasmania from January 1, 2016) provide grants on new homes only (up to a certain purchase price). Buying a new property has the advantage of lower maintenance costs than an established home.

Boehm: My preference would be for an established home based on four key advantages. One, you can move in sooner; you don’t have to wait months or perhaps even years for your off-the-plan development to be completed. Two, existing homes usually have better character and location. Three, typically they have better opportunity for improvement or changes to reflect your lifestyle and family needs … Finally, with established or existing homes, it’s easier to track and analyse price movements over time. This is not possible with new off-the-plan developments that have no history.

Elbanna: Buying off the plan allows you time to save more of a deposit, and, if the market continues to grow, this allows you to benefit from free equity [because] you lock in a price today, but don’t pay for the property until it is completed a year [or so] later.

Valentic: I advise my clients to be wary of developer incentives such as ‘free cars’ or ‘free holidays’ to try and sell their new stock as this will usually be loaded into the purchase price.

Q: Should you buy your first home as an investor or an owner-occupier?

Boehm: Why not use an investment property to help buy your first home? If you buy wisely, you can use the growth in your investment property’s value and your increased equity to help fund your deposit … As an aside, even when you buy somewhere to live, you still need to keep an eye on potential capital growth (just like you would with an investment property) as for many, your home represents a major part of your retirement nest egg.

Valentic: We’ve seen an increase in first home buyers purchasing in more affordable pockets and renting in the inner city or living at home. However, there are [depending on your location] 50 per cent stamp duty concessions for purchases up to $600,000 available for first home buyers who purchase a property as their principal place of residence.

Q: Is it better to buy a one-bedroom apartment in an inner-city suburb or a three-bedroom home in the outer suburbs for the same price?

Packham: As a rule of thumb, land appreciates in value whereas buildings depreciate in value … For this reason I would encourage buyers to purchase a three-bedroom house in a suburban area as opposed to the one-bedroom inner-city apartment. On average, units and apartments provide a slightly higher rental yield but the suburban home with land underfoot will traditionally offer the greater long-term capital growth … A buyer also needs to be mindful that the apartment building may have hefty strata fees payable for the maintenance of the building and for common services such as elevators. Many of these costs can blindside unsuspecting first home buyers.

Boehm: As a general rule … everything being equal [such as affordability, location, lifestyle needs] I would probably go for the three-bedroom home in the city’s outer suburbs because it is likely to yield better growth opportunities. This is because it has a land component (and land appreciates in values whereas buildings depreciate) and it will be attractive to a broader purchaser base such as singles, couples, and families because of its [larger] size.

Elbanna: Buy in places people want to live, and buy the best you can afford.

Valentic: Due to overdevelopment, inner-city apartments aren’t seeing great capital growth … For example, Melbourne’s middle-ring suburbs have seen great capital growth over the last 12 months and we’ll continue to see this trend into 2016 … Whatever location you choose to purchase in, it’s important to buy something with a point of difference such as an outdoor living space and off-street parking as this will set you apart if and when you choose to sell.

Q: When can I afford to buy my first home?

Boehm: The best way to work out what you can afford to buy is to work out what I call your ‘spending power’. This is calculated by [determining] your borrowing power (how much you can afford to borrow), your deposit (how much you can save), the additional costs of buying (usually about 5 to 7 per cent on top of the purchase price such as stamp duty and legal costs), plus any government grants and concessions … The key to remember is that no matter what your salary is, never overcommit yourself because the last thing you want is to become a slave to your mortgage.

Valentic: The ability to buy your first home is more about your overhead expenses than it is your actual income. For example, if you plan to purchase and rent out the property, there are plenty of options in Melbourne’s middle-ring suburbs where properties are neutrally or even positively geared, meaning you’ve got less money coming out of your pocket every month because the rental income will cover your mortgage repayments.

Q: What price range should be I looking at for my first property if my annual salary is $50,000, $80,000 or $100,000?

Packham: Basing it on a single applicant with no other liabilities, $50,000 would be $225,000 to $275,000, $80,000 would be $425,000 to $475,000, $100,000 would be $525,000 to $575,000.

Q: Is renting really ‘dead money’?

Singh: If you are planning to rent long-term and not buy, research by the Reserve Bank of Australia indicates that households renting may be potentially better off than households deciding to purchase their first home, as those renting will have higher surplus income to invest in other assets … Lenders Mortgage Insurance (LMI) is really dead money, so sometimes it can be worth renting until you have a 15 or 20 per cent deposit to avoid paying LMI.

Boehm: It’s not all bad news when you rent, because there are a number of benefits [such as] there’s no home-loan debt, it’s usually cheaper than buying, there’s greater flexibility (you can move much more easily) there’s less risk (you’re not financially exposed to things like interest-rate increases, capital loss, default and adverse credit reporting), you’re not responsible for repair and maintenance costs, and given less money is directed towards meeting housing costs, you can use this spare cash for other things like spending, investing or saving.

Q: How can I protect myself when buying off the plan?

Boehm: In my view, the best way to protect yourself is to not buy off the plan. This is because there are many risks … [For example] you’re buying something that is intangible; the finished product might not be what you expect or what is marketed in the glossy brochures. The value of your property might go down. If this happens you still have to complete the deal that could cause serious financial difficulties if your lender subsequently reduces the amount they are prepared to lend on the property. The developer may cancel the contract under certain situations (these will be included in the purchase contract) and so you could be left with nothing. The design and dimensions might change as a result of council requirements on things like open spaces and boundaries. You might not like the finished product; for instance, your city view might be blocked by a new development, there could be noisy foyers … If the developer has fulfilled their obligations, there is very little you can do to remedy these issues.

Muir: Developers and agents have their own interest in your purchase, but a good property lawyer is there solely to protect you. Make sure you double-check the plans and schedule of fixtures and finishes in your contract because these are all that you have to rely on – the artist impressions and marketing material of your soon-to-be-built property are just for show. Always engage a building inspector before settlement to inspect the property and to make a list of defects that the developer must fix during the defects rectification period.

Valentic: If you’ve chosen to buy off the plan, do your due diligence and compare what properties are selling for per square metre (internal measurements only) in the immediate area.

Q: How can first home buyers successfully bid at auction?

Singh: As a greater proportion of properties are ‘passed in’ in this market, if you have the highest bid, then you will have the first shot at negotiating with the vendor. So if you are interested and the price is within your budget, make sure you make a bid. If you still feel uncomfortable about bidding at an auction, you may want to consider finding a buyer’s advocate or agent who can bid on your behalf at auction.

Q: How can first home buyers get themselves the best home loan?

Singh: First home buyers should be confident when negotiating their home loans with their lender or mortgage broker, as often the lenders need your business more than you need theirs. Some of the items you may be able to negotiate with lenders include reduction on the interest rates advertised … request the lender or mortgage broker to waive any early termination fees, and consider receiving other benefits including a redraw ability and offset facility.

Posted by Amelia Barnes – Domain (Fairfax) on 4th January, 2016