A small deposit doesn’t have to hold you back from buying your first home. You may only need as little as 5%.
We understand that saving for a first home deposit isn’t always easy – especially if you’re paying rent on a place to live. But don’t give up on your goal of buying a first home! There are solutions that can get you into a place of your own even when your deposit is a little on the lean side.
Busting the 20% myth
It’s true that lenders like to see a deposit of at least 20% of your home’s purchase price. However, it may be possible to buy a home with less.
Some lenders may offer loans of 90% or even 95% of the property’s value, which means you can potentially get into the market with a deposit of 10% or even 5%.
What’s the catch?
A bit of background here. The amount you borrow relative to your home’s value is known as the “loan to value” ratio – or LVR. If your LVR is on the high side, you potentially pose a greater risk to the lender.
The impact of this, is that when you have a small deposit, your lender is likely to make it a condition of your home loan that you have lenders mortgage insurance (LMI) in place.
This type of insurance protects the lender, not you, so it’s a way for lenders to lower the risk of a high LVR. In fact, LMI typically applies when you have a deposit of less than 20%.
LMI is something your lender will organise, and while it’s another cost to wear, your lender may let you capitalise the cost, which simply means tacking the LMI premium onto your loan. This lets you pay it off gradually over time.
How’s your credit record?
An important point, is that when you have a very small deposit, like say, 5%, both the lender and LMI insurer will take a good look at your credit record. Any problems may result in a “please explain” from the mortgage insurer.
Allow for upfront costs
Buying your first home doesn’t just involve saving for a down payment – other upfront costs apply too. These can include stamp duty and conveyancing fees, plus any costs to move into your new place.
Bear in mind though, as a first home buyer you may be eligible for the First Home Owner Grant or stamp duty savings, which can help with your home buying budget.
Options are available
The main take-out is that you may still be able to buy a home even when you don’t have a substantial deposit. Yes, there may be a few extra hoops to jump through but it’s reassuring to know that options are available – and they’re worth checking out.
It’s always a good time to chat to a broker and find out what your options are – contact us today.
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- Chapter One : Getting started
- Chapter Two : Your Dream Home
- Chapter Three : Money Matters
- Chapter Four : Ways to Purchase
- Chapter Five : Understanding Interest Rates
- Chapter Six : Understanding Home Loans
- Chapter Seven : Lending Sources
- Chapter Eight : Getting Your loan
- Chapter Nine : Choosing a Home
- Chapter Ten : Steps to Settlement