How to go from renter to owner

Rents have soared for the past year all around Australia. This is all down to supply and demand.

There’s not enough stock on the market to meet the number of would-be tenants out there and, as a result, vacancy rates are super tight at around 1% or lower in most locations…pretty crazy when you consider that a 3% vacancy rate is widely what’s considered to be a ‘balanced market’.

Property data firms have revealed rents have risen by more than 20% on average over the past year. These increases have coincided with falls in property purchase prices in more than a few markets, meaning the gap between owning and renting has narrowed significantly.

As a result, more tenants might find themselves able to make the move from renter to owner, especially with rising interest rates actually boosting savings accounts and making it a little easier to get deposits together.

What’s your goal?

In certain markets, being an owner occupier may mean paying less on a mortgage than you would otherwise be putting down in rent each month, while accessing future equity growth to leverage into an investment.

Or, buying an investment property and receiving a rental income will mean you benefit from inflation rather than paying more of your own money to fund someone else’s portfolio.

People often want to become an owner occupier as quickly as they can, only to end up heavily mortgaged and, with recent rate rises, struggling with growing repayments. But being an investor first and using an interest only loan can boost your income and savings, while future equity growth can put you into a position to leverage into a permanent place of residence down the track, even if you have to keep paying rent in the meantime.

Markets to target

City fringes and regional areas are often the last to have value growth in a price boom and the first to correct when market conditions change. But the strong demand for affordable rentals can push local rents higher. That is why investors seeking a positive cashflow portfolio are often competing with first home buyers in those areas.

Those markets might offer positive cashflow opportunities because rents are higher than mortgage repayments and holding costs. So if you are renting in such an area, and can get yourself into a position to buy, you might find you are better off week to week, plus in a position where you can access the wealth created by future value growth.

Preparing yourself

You need to save a deposit, ideally at least 20% of the property’s value, to avoid lenders mortgage insurance.

Rent may be costing you a lot, but if you cut down on non-essential items, you will look responsible to a bank when you apply for a loan. These days, reasonable lenders will consider your rental payments as evidence of savings.

Your bank statements should show at least three months’ worth of responsible saving and spending activity when you apply for a loan.

Plastic is not fantastic

If you’ve got a credit card with debt on it, pay it off as soon as you can and then cut up the card. Banks consider a credit card limit the same way they consider debt already owed when assessing a loan. You may have never used a credit card, but if it’s got a $10,000 spending limit on it, that may be $10,000 less that you can borrow.

Remember also to allow for the extra costs you will encounter as an owner. The maintenance, repairs and other things your landlord used to take care of will be your problem. Then there are water bills, council rates, strata levies … the list goes on.

At your service

You will need a steady income to service a loan. Lenders will want to see payslips, tax returns and other evidence of steady employment. If you are self-employed, they will often take an average of your last two years’ worth of income to work out how much you can borrow.

Most lenders still use a 3% repayment buffer when assessing serviceability, even though rates have risen by 4% since last year. They want to make sure you can meet repayments if rates rise further, so that’s something to be wary of.

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