When you’re struggling to save up for a home loan deposit, it can sometimes feel as if your dream is going to be forever out of your reach. But help is at hand. Finty has some advice about how to get into the housing market with a low deposit, and a range of low deposit home loans to suit your budget.
By Yvonne Taylor | Updated 18th March 2020
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It’s a home loan where the lender is advancing more than 80% of the property’s value as calculated by a professional valuer.
Many lenders have a strict policy about how much borrowers will need by way of a deposit before they will be approved for a home loan. The amount of deposit needed is usually calculated as a percentage of the lender’s assessment of the value of the property the borrower wishes to purchase. So rather than being a fixed dollar value, the deposit you need will vary depending on the value of the property you are hoping to purchase.
For example, many lenders will require hopeful borrowers to have a 20% deposit. Another way of expressing this is that lenders require a loan-to-value ratio or loan-to-valuation ratio (LVR) of 80% or less. This simply means that, if you are hoping to purchase a property valued at, say, $500,000, you stand a much better chance of being approved for a loan if you have a $100,000 cash deposit and only need to borrow $400,000 (80% of the property’s value).
However, just because many lenders prefer a 20% deposit, it doesn’t mean that you can’t get a loan with a smaller deposit. Some lenders will be prepared to give you a loan if you have a 10% or even only a 5% deposit. You just need to meet some extra conditions.
First of all, you need to be realistic about what you can afford. If you have saved a deposit of $25,000 there’s not much point in looking at properties advertised at $600,000, or with an indicated price in that range. A home valued at around $500,000 is probably going to be the maximum you can get a loan for, because you only have a 5% deposit, and even then you’re going to have to jump through a few extra hoops. Also bear in mind that the lower your deposit, the higher your periodic repayments are going to be, and you need to budget for them.
Then, you need to tick several boxes to secure a low deposit home loan:
A loan guarantor, in the context of a low deposit home loan, is usually a close family member (very likely one or both of the intending borrower’s parents) who is prepared to offer as additional security a property they own outright, or have substantial equity in. The lender will usually take possession of the guarantor’s property title deed, and put on it a charge for the required amount of security.
For example, the likely charge against the guarantor’s title would be $75,000 for a loan against a property valued at $500,000 where the borrower had only a $25,000 deposit. This charge would remain on the loan guarantor’s property title deed until the principal of the loan they were guaranteeing fell below $400,000, as a result of the borrower’s repayments. At this point the borrower and guarantor could request the removal of the charge and the return of the now unencumbered title deed.
Guaranteeing a low deposit home loan is not something to be undertaken lightly, since there is a risk of substantial financial loss if the borrower defaults on the loan, but it is something that many parents are prepared to do for their children.
Lenders’ Mortgage Insurance is a policy which protects the lender against loss if the borrower defaults on the loan. If your deposit is less than 20% of the property’s value, and you do not have a loan guarantor, the lender is likely to insist on this insurance policy. Although the policy is designed to protect the lender — not the borrower — against loss, it is the borrower who has to pay the substantial premium cost, which may be more than $10,000. However, many lenders will agree to add the premium cost to the loan amount, so that it can be repaid gradually over the term of the loan.
Following legislation which came into effect on 1st January 2020, the federal government will act as loan guarantor for up to 10,000 low deposit home loans each year. From 1st February 2020 these government-guaranteed loans will be available from 27 lenders. The scheme is only available to first-time buyers, and there are eligibility limits depending on the borrowers’ income, age, and the property price. Find out more at the National Housing Finance and Investment Corporation (NHFIC).
All Australian states and territories currently have cash grants available to first home buyers, as well as stamp duty concessions. Eligibility, conditions and amounts vary from state to state, but you can see the details for your area at firsthome.gov.au. It’s a great option for boosting your deposit and avoiding LMI, but in most states and territories you will need to buy a new home rather than an established property in order to qualify.
You may be able to save for your home deposit within your superannuation fund, obtaining concessional tax treatment to help you save faster, and then applying to have the funds released when you are ready to buy. It’s quite complicated so you may need to get advice from an accountant, but you can see the details at the ATO’s First Home Super Saver Scheme page.
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