Buying blind: Most first-home buyers flunk basic property test
First-home buyers are clueless about the ins and outs of property buying, according to a study that found a concerning 61 per cent failed* a basic property-buying literacy quiz.
In contrast, only 27 per cent of owner-occupiers and a quarter of investors failed the same test.
Home loan lender ME tested the knowledge of 1000 Australians who were ready to buy their first home or had already bought a property to live in or as an investment.
Nearly 70 per cent of first-home buyers said they were confident about making financial decisions, and about half thought they understood the property-buying process and related costs. But the survey showed different.
Key first-home buyer knowledge gaps
- 88 per cent of first-home buyers did not understand that lenders’ mortgage insurance covered lenders, not borrowers.
- 85 per cent did not know there’s no cooling-off period when buying at auction (66 per cent of investors knew that).
- 78 per cent did not know that if you win a property at auction you must pay a deposit that day.
- 66 per cent did not know what conveyancing was; 38 per cent wrongly thought it meant checking boundaries or physical issues with a property before you buy.
- 63 per cent did not know what an offset account was.
ME head of home loans, Patrick Nolan, said overconfidence and low financial literacy were a risky combination that could cost 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,” he said.
“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.”
Not just the first-timers
While owner-occupiers and investors were – predictably – more informed than first-time buyers, ME’s test did identify areas for improvement.
Among the most worrying findings, 66 per cent of owner-occupiers and 65 per cent of investors were unsure of the key things that contributed to how much interest was payable on a loan – meaning they could be paying too much in interest.
Meanwhile, 53 per cent of owner-occupiers and 54 per cent of investors did not know that deposits must be paid on the day for properties bought at auction. That means they might be caught out if they are the successful bidders, and don’t have their money ready.
However, there were some aspects of property buying that respondents excelled at.
Nearly all of those planning to buy or who had already purchased knew buyers pay stamp duty, not vendors (90 per cent got this correct).
Similarly, 71 per cent understood that “equity” is the difference between a property’s market value and the amount owing on the mortgage on it.
Furthermore, 69 per cent knew less interest was payable on a 10-year home loan than one for 30 years, and 62 per cent understood banks consider multiple factors in determining how much to lend a borrower.
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,” Mr Nolan said.
“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 heads in the sand.
“But, like it or not, financial decisions – including buying a property – are best made on facts. A hunch or a guess could lose you thousands.”
Mr Nolan said there were many ways home buyers could get informed:
- Online research. Educational options include the government’s MoneySmart website and ME’s engaging online school of money, Ed, which outlines the basics and explains home-buying terminology.
- Crunch the numbers. Many lenders have online calculators to help you understand things like borrowing power and what your repayments might be.
- Independent advice. Speak to independent experts, such as your accountant, for answers to other questions.
ME’s Property Literacy Survey involved 1000 Australians who were looking to buy or had already bought a property. It was conducted online in May 2018.
*A ‘pass’ means at least 50 per cent of questions right.