by Scott Pape - September 4th 2010
Judging by his comments this week, the star of Channel Nine’s The Apprentice, Mark Bouris, is reclaiming his position as the “Wizard” of Oz.
His new financial outfit, Yellow Brick Road, is pitching for first homebuyers’ business by removing the need for them to show proof of savings.This week Bouris was quoted in the press saying: “If you have inherited the money, won it on lotto, or you received a great tax return, it doesn’t matter, as long as you’ve got a deposit and can service it.”
Bouris explained that the big banks have changed their credit criteria in light of the global financial crisis and want to be really sure about having people prove they’re good savers.
At the moment most banks require three months of pay slips and a record of regular savings – which, as a bank shareholder, I’m glad to hear.
Like all bankers, Bouris is trying to make a buck. Nothing wrong with that.
But it is a timely reminder that first homebuyers not only need the bucks, they need to use their brains when entering into a life-changing commitment.
Goodbye the yellow brick road?
Buying a house without a solid savings strategy is a dumb idea.
There’s a very good reason banks have historically required people to save for a deposit – and an even better reason the banks are putting the screws on their lending.
Rates are going up, and Australians have some of the highest household debt levels in the world.
Buying a home isn’t just a financial decision; it’s also an emotional one.
People get swept up in the rush to buy a home without thinking through the ramifications of a 25-year commitment. It’s not just about having the bucks. It’s about developing the behaviours and maturity to spend less than you earn.
And the way to prove that to your banker, and more importantly yourself, is by committing to saving for three or four years to come up with a deposit.
Work out how much you can borrow and calculate your house deposits with our handy money calculators
We’re not in Kansas anymore
Somewhere over the rainbow – in the US – they’ve tried it and failed miserably. But now this tactic isn’t just in Kansas anymore; it’s here as well.
The problem over the past 10 years is that successive governments have thrown tens of thousands of dollars at first homebuyers, as have banks.
The upshot is that some people have been lured into buying overpriced homes they can’t afford. And that’s a recipe for disaster.
The most recent figures show that over half a million households are in some form of mortgage stress. And this week I found out what mortgage stress actually entails (see story below).
Many families I’ve met have told me that a trade-off of meeting the mortgage involves things like having their phones disconnected, worrying about putting petrol in the car, and having to shop three times instead of once because they don’t have enough money to pay in one hit.
For these people the Great Aussie Dream has become the Great Aussie Nightmare.
This week, stronger than expected economic growth figures could put further pressure on the Reserve Bank to increase rates. As rates move up, more people could find themselves struggling.
There’s no place like home
True, but you don’t have to rush. The deal of a lifetime comes around a couple times a month.
The reason most people find themselves in mortgage stress is they can’t afford to buy in the first place. Without savings skills they’re behind the eight ball from the start.
In fact, anyone who listens to bankers’ bulldust should be whistling If I Only Had a Brain all the way home (to the house they can’t really afford).
In this market you should shoot for a 20 per cent deposit, which means you’ll not only save on lender mortgage insurance but you’ll probably be able to take your pick of the banks.
Ideally your repayments shouldn’t be more than 30 per cent of your take-home wage. If they are, you’ll struggle to have enough fat in your finances to cope with the coming rate rises.
Over the long run most people find out that it’s often harder taking the “easy” option.
Stressed out, driven out
In 2002, Rebel Lorenz and her husband bought a classic “renovator’s delight” in Melbourne for $330,000.
The couple wanted a family home of their own to raise their three children in.
“Looking back on it, we really couldn’t afford it,” she told me.
“But we thought the first-home buyers grant was too good to pass up, and the banks were willing to lend us the rest, so we thought why not?”
Their plan was to quickly get on top of the loan repayments and then spend what little they had left over on slowly doing the place up.
Yet, like many couples without a savings history behind them, they could never quite get on top of their repayments.
They were having trouble making ends meet. Bills were going unpaid. They moved to interest-only payments.
“Finally, after four stressful years of living in an absolute dump, I cracked,” Rebel said.
“We ended up selling the house for $380,000, so we made a profit – well, at least on paper.
“But when you factor in all those years of stress, we came out way behind. Our marriage broke down. We learned the hard way that long after the bank manager had left and we’d gotten the grant, we were stuck trying to pay this thing off.”
Rebel is adamant she’ll get back in the property game, but this time she’ll save up a big deposit.
Tread your own path!
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Photo: http://www.flickr.com/photos/didiergoas/2257617633/
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4 comments
Good advice Scott, thanks for sharing.
There really is no place like home. Its an amazing place. Great advice Scott. And also great wizard of oz quotes
I got a mortgage with wizard when they were around, then they sold to Aussie, who sold (or gave) my mortgage to another finance company (which is owned by GE money). Now I am paying a much higher interest rate then whats now on offer from other banks, and because I didn’t need much of a deposit, it’s hard to refinance with the major banks because they are now wanting a higher deposit then what I have in equity… Guess I’ll just have to keep making the extra repayments and build up my equity until I am in a position in which I can refinance…
mmm i I think that your view is of interest.