New research shows that first home buyers are clueless when it comes to knowing the ins and outs of property buying, with a concerning 61% of first home buyers failing1 a basic property buying literacy quiz, compared to only 27% of owner occupiers and a quarter of investors.
Home loan lender ME tested the knowledge of 1,000 Australians who are looking to buy their first home or have already purchased an owner occupied or investment property.
Turns out, those buying their first home were not as clued up as they’d like to think, despite nearly 70% saying they feel confident about making financial decisions and around half saying they understand the property buying process and related costs.
Key first home buyer knowledge gaps:
- 88% of first home buyers don’t understand that lenders’ mortgage insurance covers lenders, not borrowers.
- 85% of first home buyers don’t know there’s no cooling off period when buying at auction, compared to 66% of investors.
- 78% of first home buyers don’t know that you need to pay the deposit on auction day.
- 66% of first home buyers don’t know what conveyancing is), with 38% incorrectly thinking that the term refers to checking boundaries or physical issues with your property before you buy.
- 63% of first home buyers don’t know what an offset account
ME Head of Home Loans Patrick Nolan said overconfidence and low financial literacy is a risky combo that could be costing first time buyers.
“It’s difficult enough for those trying to get their foot in the door to save up a deposit and decide where to buy. A lack of necessary property buying knowledge is sure to increase the risk of young Aussies being caught out with unexpected costs, adding to the existing stress,” said Nolan.
Not just the first timers
Owner occupiers and investors are predictably more informed than their first home buyer counterparts, but ME’s test still identified some areas for improvement.
Among the most worrying findings, 66% of owner occupiers and 65% of investors are unsure of the key things that contribute to the amount of interest you pay on a loan, meaning they could be saving more on interest.
Meanwhile, 53% of owner occupiers and 54% of investors don’t know that you need to pay the deposit on auction day, meaning they could be seriously caught out if they win a bid and don’t have the money ready.
Thankfully, there were some aspects of property buying that respondents excelled at. Nearly all of those planning to buy or have already purchased a property understand the buyer pays stamp duty, not the vendor (90% got this correct). Similarly, 71% understand what ‘equity in your home’ means i.e. the difference between the market value of your property and the amount you still owe on your home loan.
Furthermore, 69% understand you pay less interest on a 10-year home loan versus a 30-year loan, and 62% understand that banks look at multiple factors before determining how much they can lend borrowers.
ME’s advice for home buyers
“Financial literacy is a valuable asset and one of the biggest money savers over time, especially when it comes to buying what is likely to be the biggest investment of your life,” said Nolan.
“Some Aussies fail to educate themselves because they find finances dull and complex and think they know best, while others find working with numbers difficult and put their head in the sand.
“But like it or not, financial decisions including buying a property is best made on facts – a hunch or a guess could lose you thousands.”
Nolan said there are multiple ways home buyers can get informed and take charge:
- Do your online research. There are plenty of educational options like the Government’s MoneySmart website and ME’s engaging online school of money, Ed, that can outline the basics and explain all the home buying terminology.
- Crunch the numbers. Many lenders have online calculators to help you understand things like borrowing power and what your repayments could look like.
- Independent advice. Speak to independent experts like an accountant who can answer all your unanswered questions.
From Me Bank