First Home Buyer Debt: How To Secure And Manage Financing

It has been made harder to secure financing in the last decade, and that has been largely due to one very significant event – the global financial crisis.

During 2008-2009, the global economy went into a tailspin due to a collapse in the global financial markets. As many of you reading this may know, the root of the problem was founded in poor lending practices. Banks and other financial institutions advanced subprime grade mortgages to borrowers who were in no financial position to assume that debt obligation.

These mortgages were packaged into collateralised debt obligations (CDOs) and other financial instruments that were then sold on to the public market. As most of you know, the story played out so sensationally that movies were made detailing the event. Borrowers defaulted on the ridiculously high loan covenants, as expected. Tenants vacated properties without notice and landlords lacked any proper recourse. The CDOs and other financial instruments housing these subprime mortgages became poisonous and contributed to the collapse of several historic financial institutions, as well as federal investigation and sanctions against the others.

The global financial crisis had a ripple effect throughout the lending industry, including Australia, which was somewhat insulated by the GFC due to favourable economic conditions at the time. Critical pieces of legislation (such as the National Consumer Credit Protection Act and the Credit Act) were written into law to clamp down on unconscionable lending practices and expand protections offered to the borrower. Following the inception of these laws, a greater onus was placed on banks and financial institutions to complete rigorous due diligence prior to lending money to borrowers. However, most financial institutions (including those that are aligned with home builders), have sufficient latitude within these laws to include up-selling tactics targeted at first home buyers.

As I mentioned in an earlier post (link here), a first home buyer should keep the home purchase and financing decisions separate. Most established builders offer financing, which may seem like an efficient option at the time, but are riddled with bias and asymmetry of information. For example, large building companies typically split out their brands to include a separate first home buyers division. This is done mainly to provide the impression that there is a group within the company that is dedicated to assisting first home buyers. However, a common misconception is that these products are typically cheaper than other established brands across the company.

The fact is that the more established brands offer higher specification products at a lower price, compared to the products of the first home buyers’ division. The main reasons for this is that the latter division has an increased cost base due to higher financing costs associated with dealing with first home buyers, as well as a greater cancellation rate when compared to other company divisions; both of these factors ultimately impact the bottom line of the company.

As a first home buyer, you won’t be privy to this information, and consequently, be willing to secure greater finance on a potentially inferior product. By independently securing financing, you can place greater attention on researching and differentiating the products that are within your budget.