Mistakes No First Time Home Buyer Can Afford to Make!

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Last weekend, RAMS Home loans decided to round up a few of the flock and give them a fleecing, running full-page ads in the press stating: “No deposit? No worries. RAMS lets you use the increased Federal Government’s first home owners grant as your deposit. So if you’d like to start looking for a home rather than a deposit, why wait?”

Three reasons to wait

Let me give you three reasons:

First, because before borrowing the biggest sum of your life you need to develop the skill of saving (or even better, have some savings already).

Failing to do so could see you struggle to pay your debts, and then hit the wall which, come to think of it, is exactly what happened to RAMS itself earlier in the year.

Second, because the affordability computer models that most lenders use to determine your application is geared towards selling you as much money as possible.

Remember, the computer thinks “entertainment” is sitting at home playing Tetris and eating home-brand corn chips on a Saturday night.

Third, at some stage you’ll probably want to start a family, which will both reduce your income and increase your expenses.

What they don’t tell you

But don’t hold your breath waiting for your lender to ask you about this. That could constitute advice.

This is purely sales from a species that needs to be shorn and crutched once a season. Click go the shears!

It may come as a surprise, but bankers aren’t legally obliged to take into account your capacity to repay other than the market-based mechanism of ensuring they’ll get their money back eventually (what it ends up costing the borrower is another matter).

This is perhaps why young people often say to me “but surely they wouldn’t lend me the money if they didn’t think I could pay it back”.

Yet, just like in marriage, the person you start off with is rarely the person you end up with – most mortgages are refinanced well before the seven-year itch (and become someone else’s problem).

Yet while RAMS has made a perfect play for 20-something

Generations X and Y

Gen Y-must-I-wait with a deal that could eventually cause problems later, they’re little lambs compared with one crowd that is staking out the 30-somethings who make up Generation X.

These 30-somethings can’t take a trick – they bought the Boomers’ over-inflated property and therefore are shouldering massive mortgages.

At the same time they’re trying to pay school fees and swimming lessons, and hopefully find enough shrapnel in the back of the couch to go to Wet’n'Wild once a year.

And more often than not, they’re trying to achieve all this on one income.

Now they’re facing a recession. Unlike their younger Gen Y brothers and sisters, Gen X know what a recession is – they graduated from university just in time to get their honours in an economic slowdown.

At the time they watched middle-level managers (otherwise known as “the fat”) rightsized, downsized and outsourced or, in plain speak, sacked.

Guess who make up the bulk of middle-level management today?

Gen X marketing

It’s therefore not surprising that the Gen Xers I speak to have simple dreams of paying off the mortgage and finally getting off the Nescafe and cask chardy.

Which is where a financial outfit called Gen X Lifestyle Solutions has staked its claim. It has focused its marketing efforts so hard that it’s even incorporated the generational tag into its name so as to avoid confusion.

Smart.

The company’s website explains: “If you’re like most people, you dream of the day when you’ll finally own your own home. The day you make your last repayment to the bank and you’re able to relax knowing your family’s future is secure. At Gen X Lifestyle Solutions, we can help you make this dream a reality.”

To an embattled Gen Xer with a 30-year loan, this may not sound so bad. The dudes at Gen X Lifestyle Solutions have a plan that will enable you to “Unlock Your Financial Shackles” and “Pay off your mortgage in 8-10 years!”.

This is apparently achieved by using a strategy they call Mortgage Multiplexing, which is “Equivalent to 2.99 per cent Interest Rate”.

Multiplexing

Just what is Multiplexing? No idea. Sounds like a verb: “I went out last night and ended up getting, like, so Multiplexed.”

Finally, curiosity got the better of me, so I rang the company and spoke to a number of their representatives.

They told me that Multiplexing involved taking the equity out of your home, buying properties that were “guaranteed” to grow at 13 per cent per annum, and then, after a number of years, using your profits to pay down your existing home loan.

In the boom, property spruikers pushed property by promising you’d get rich quick. Now these guys are pushing property to get you out of debt quick.

The representatives of the company had a lot to say when I rang, but couldn’t fully explain how it worked. The conversation went something like this:

Barefoot: “How can you guarantee that the properties you select will grow by 13 per cent per annum?”

Gen X Lifestyle Solutions rep: “It’s very complicated. It takes two-and-a-half hours to explain.”

Barefoot: “I’m a smart guy. Try me.”

Gen X Lifestyle Solutions rep: “Unfortunately we can’t do it over the phone, it’s very complex.”

Barefoot: “Listen, dude. You know what I dislike? That spruikers like you slip through the regulatory cracks and are able to give financial advice that can potentially wreck a young family’s future while you line your pockets.”

Gen X Lifestyle Solutions rep: “We don’t offer financial advice, we offer education.”

(That sounds like a legal loophole.)

Over the past decade, the Government has regulated the pants off financial advisers, but with unsophisticated investors owning a trillion-dollar pot of gold they really had no choice.

Frustratingly, these regulations do not apply to property.

That’s why it’s a cowboy’s paradise. Mortgage brokers, real estate agents, property gurus, seminar slimeballs and property developers can advise people to borrow hundreds of thousands of dollars and invest in properties that are riddled with conflicts, kickbacks and ongoing commissions – none of which needs to be disclosed to the poor punter.

The Government has done a lot to protect people who have a nest egg. Now it’s time to protect the younger people who are in the process of building theirs.

Tread your own path!

Photo: www.flickr.com/photos/simonpais/2173155702/in/set-72157594357202032/

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