How will the banking royal commission impact first home buyers?

Buying a property has long been hailed as the great Australian dream. After all, your home is your castle.

However, the lead up to the February royal commission sparked concern amongst first home buyers that their dreams of owning a home would remain just that. The possibility of stricter lending coupled with a steady decline in house prices made entering the property market seem tantalisingly out of reach for many.

Fortunately, recommendations from the banking royal commission have been less severe than expected where first home buyers are concerned. For those considering entering the market, this is how you may be affected.

Lending criteria

One of the key issues that arose prior to the royal banking commission was the way in which banks were assessing home loan applicants. Previous findings revealed that major banks were lending more than their customers could afford, leaving them with mounting debt and loan repayments they were unable to meet.

Lending standards were therefore tightened in late 2017 through to 2018 to ensure banks were meeting responsible lending laws. As AMP’s chief economist Shane Oliver suggests, if this hadn’t been the case, home buyers would now be feeling the effects of the recent commission a lot harder than they currently are.

Put simply, the necessary changes to lending have already taken place over the past year, meaning that we may not see a huge effect on loan availability. However, anecdotal evidence suggests some lenders may be going through the spending history of potential borrowers with a fine-toothed comb.

Mortgage brokers

Recommendations from the royal commission also found that brokers will now need to work within the best interests of buyers. Previously, brokers had the ability to favour home loans with higher commission rates or help applicants to fudge their finances to get bigger loans than they should have been allowed, resulting in higher broker commissions.

Because of this, trail commissions will now be axed along with all broker commissions in general. While this works in the buyer’s favour by helping them avoid unsuitable loans, it also means that buyers still wishing to use a broker will now have to foot the bill themselves – the up-front costs will no longer be covered by banks.

The property market in general

First home buyers who were previously pushed out of the market by skyrocketing house prices and record high clearance rates are now in an advantageous position. Falling property prices and historically low rates are providing new opportunities to purchase.

Major capital cities such as Sydney, Melbourne and Perth have fallen by as much as much as 10 per cent since peaking in 2017, with property values lower now than they were in the 1980s when Australia was on the brink of a recession.

Though this is less than welcome news for investors, first home buyers have cause to celebrate – though not without caution. For those with a deposit saved, now could be the perfect time to start shopping around before property prices increase again. Due to the value available in the market right now, a good tip for home buyers is to bargain to where you think the market will bottom out.

In other words – if you think prices will drop a further five per cent in your city, then try to negotiate to five per cent below the asking price. This will give you a built-in buffer in a falling market.

For now, the great Australian dream may be closer than you think.

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