ME recently tested 1,000 Australians on the basics of property buying in May and 61 per cent of first home buyers failed, compared to 27 per cent of owner-occupiers and 25 per cent of investors.
According to the non-major bank, first home buyers are largely “clueless” despite nearly 70 per cent expressing confidence in making financial decisions and about half saying they understand the property purchasing process and the associated costs.
ME’s study found that 88 per cent of first home buyers do not understand that lenders’ mortgage insurance covers lenders, not borrowers, while 85 per cent are unaware that there’s no cooling off period when purchasing at an auction, compared to 66 per cent of investors.
Additionally, 78 per cent of first home buyers lack knowledge of the fact that deposits need to be paid on auction day, while 66 per cent are unfamiliar with conveyancing. According to the study, 38 per cent incorrectly thought conveyancing refers to “checking boundaries or physical issues with your property before you buy”.
Further, 63 per cent of first home buyers do not know what an offset account is.
ME’s head of home loans, Patrick Nolan, said that the combination of overconfidence and low financial literacy is risky and potentially costly for first home 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,” Mr Nolan said.
Knowledge gaps were also identified among owner-occupiers and investors, with 66 per cent of the former and 65 per cent of the latter unsure of the key factors that contribute to the amount of interest they pay. According to ME, this indicates that they could be saving more on interest.
Furthermore, like many first home buyers, 53 per cent of owner-occupiers and 54 per cent of investors are not aware that deposits need to be ready on auction day.
Mr Nolan advocated the importance of financial literacy especially when it comes to investing in property, saying that financial decisions are “best made on facts” rather than “a hunch”, which could end up costing borrowers thousands.
On the other hand, 90 per cent of survey respondents are aware of the fact that buyers, not vendors, are required to pay stamp duty, while 71 per cent understand the meaning of “equity in your home”.
The ME survey also found that 69 per cent know that less interest is paid on a 10-year home loan versus a 30-year loan, while 62 per cent are aware that banks assess multiple factors before determining the amount they are willing to lend to prospective borrowers.
Earlier this year, another survey of 1,000 Australians revealed that 56 per cent of first home buyers are unaware of the government initiative First Home Super Saver Scheme (FHSSS), and of the respondents that are aware of the scheme, only 1 per cent are able to directly identify its components.
Despite the limited awareness, an Aussie Home Loans survey of 600 Australians found that nearly a third (30 per cent) of consumers taking out a home loan in the next year will be first home buyers.
[Related: Government incentives fail to attract FHBs]