THEY MAY NOW QUALIFY TO PURCHASE WITH ZERO CASH UPFRONT …  The extraordinary combination of recent reductions in interest rates (with more to follow), the announcement of huge increases in the First Home Owner Grant (FHOG) and the much publicised shortage of residential property (especially in Sydney), means those who qualify may now purchase a residential property with zero cash savings up-front and expect a relatively low ongoing cost to hold the property.

Recently we talked about the convergence in the cost of renting versus home purchase and noted the point in time was looming where renters would start seeing the financial advantage in jumping into home ownership as the cost differential between the two started to narrow.

Since then the Federal Government has opened the floodgates.

With a FHOG of up to $21,000 and the existing stamp duty waiver by the State Government, a first home buyer who purchases a new property in Sydney for say $300,000 and borrows up to 95% of the purchase price, (yes some banks are happily lending to that LVR with mortgage insurance) will not need any personal savings to complete the transaction. In fact they may collect some $3000 in “change” after the transaction.

This is quite extraordinary but, as you’ve heard in the media, the increased grant is only available until 30 June next year, so those who seek to take advantage of it will need to get their act together fairly promptly.

When you combine this with a range of strategies, including buying off-the-plan (to defer settlement with the expectation of further falls in interest rates), and/or using the FHOG to get into the property, meeting the minimum occupation requirements (you have to live in the property for 6 months), then placing the property in the rental market where the cost to hold may be quite low and getting lower as rents rise and interest rates fall, the outcome for someone who otherwise may struggle for years to save a regular deposit, is obviously a good one.

 The FHOG is made available at settlement so a purchaser may need to fund a deposit on the contract which is recouped from the grant later on. With deposit bonds, existing savings, or short term loans from family etc. this may be overcome.

Other than the one-off opportunity to get into the market this presents to anyone who hasn’t previously owned a home in Australia, there is a greater spin-off benefit for the wider market.

So whilst they are not quite giving away free property, the opportunity this presents for individuals as well as the stimulus it will provide at that end of the market is a very interesting development.