It doesn’t always take a big deposit to get into your home, and we explain why this real estate myth is just that.
Today’s housing market can make it tough to save a 20% deposit for your home – especially if you’re buying in one of our big cities where property values are rising rapidly.
The good news is that even if you are buying a house at a young age you may still be able to afford it even if you don’t have significant savings.
That’s because many lenders will let you borrow up to 95% of your property value. So, if you have a buying budget of, say, $400,000, instead of trying to save a 20% deposit of $80,000, you could still secure a home loan with a far more achievable deposit of $20,000. This is the case for owner-occupied properties, not investments. For owner-occupied loans, some lenders let you borrow 95% including lenders mortgage insurance (LMI) and some let you borrow without LMI. More on LMI below.
What’s with the 20% benchmark?
There is a good reason why 20% is seen as the ‘ideal’ deposit.
If you borrow more than 80% or more of your home’s value, you will be asked to pay lenders mortgage insurance (LMI). You may have heard of this – it’s a type of insurance that protects the lender (not you) if you are unable to keep up the loan repayments.
Unlike normal insurance, LMI isn’t something you need to shop around for. Your lender will arrange it, and it involves paying a one-off premium when you take out a home loan. The bigger your deposit, the less you pay in LMI. You may be able to add LMI to your loan, which lets you pay it off over time instead of having to pay it up front when you take out your home loan.
What about other costs?
Young home buyers also have to keep in mind that buying a home involves more costs than a deposit. You’ll need to stump up cash for other things like stamp duty and legal fees.
Be sure to factor these expenses into your home buying budget.
Any other solutions?
Many first home buyers enjoy a helping hand from their family to get across the deposit line. That doesn’t mean your parents have to provide a cash hand-out. Family members can act as guarantor for all or part of your home loan, and this can also be a way of avoiding the cost of LMI. It pays to get good legal and mortgage advice, so you know what your options are and how you can get in the property market sooner!
The bottom line is that there are lots of strategies and tips for first home buyers you can adopt to get into your first home sooner even if you haven’t reached that elusive 20% deposit. The key is to talk to your local Aussie broker, who can discuss a range of options suitable for your circumstances.
Did you buy a new home with less than a 20% deposit? How did you do it?
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