Should first home buyers use drastic measures to scrape together a deposit?

Everyone agrees: buying a home in Australian capital cities is insanely expensive.

With property prices on average four to five times higher than household incomes, saving a deposit for your first home is becoming harder than ever. No wonder young Australians are getting onto the property ladder later. Data from the Australian Bureau of Statistics shows that back in 1982, about 56 percent of 25- to 34-year-olds owned a home, but by 2011 this figure had fallen to 34 percent of that age group.

And now, research by Lenders Mortgage Insurance provider Genworth has found that first home buyers are turning to credit cards and personal loans to help them accumulate that elusive deposit.

This year so far, only 51 percent of first home buyers have used their own savings for a deposit – down from 66 percent in 2014 – while 19 percent are using credit cards and 18 percent are relying on personal loans. This is a huge jump from 2013 when 3 percent used credit cards and 8 percent opted for a personal loan to fund their first home deposit.

With the Sydney median house price hitting $1 million and Melbourne currently at $668,030, according to the Domain House Price Report, it’s easy to see why first home buyers prefer to take the leap with alternative ways of gathering a deposit rather than delay their entry into the property market only to have to borrow even more. After all, over the past year the size of loans to first home buyers has increased in NSW, Victoria, Western Australia and the ACT.

However, I would recommend thinking carefully before you use your credit card to access a ‘balance transfer’ for your deposit. You are effectively borrowing cash from your credit card provider, which you will have to repay at the standard interest rate.

Considering the average credit card interest rate sits at 17 percent, this is one of the most expensive ways to borrow money and could end up costing you a lot more than the amount you actually borrow. By way of comparison, home loan interest rates on begin at 3.79 percent.

Some credit cards offer balance transfers with a low or zero interest rate for a fixed period (12 or 18 months) before it reverts to the standard rate, so be sure to research your options if you go down this route.

Generally speaking, personal loans carry lower interest rates than credit cards; currently on these range from 6.9 percent to 16.99 percent for an unsecured loan. But you are still effectively borrowing money to borrow money and that’s a more expensive option than saving for a deposit – even if that deposit has to keep growing to keep up with the market.