You’ve been saving… and saving. What if you want to buy but have a low deposit? We look at your options.
Key takeout: the 20% ‘rule’ – that you can’t buy a home without a 20% deposit - isn’t always true. While having 20% saved means you’ll likely avoid Lenders Mortgage Insurance, there are still ways you can buy your first home with a small deposit.
Low deposit home loans
There are some home loans that don’t require such a sizeable deposit – but you have to be deemed a low-risk applicant to qualify.
Lenders may allow you to borrow up to 95% of the home’s purchase price only if you meet certain strict criteria, which could include a spotless credit history, stable employment, a high enough income that allows you to meet the repayments, genuine savings and minimal debt.
The location of the property may also impact your eligibility for a low deposit loan as some lenders choose not to take a risk on properties in smaller towns or high-rise buildings in the CBD.
Is there a catch?
Having a smaller deposit can incur other costs. Firstly, lenders will normally charge you Lenders Mortgage Insurance (LMI) if your deposit is less than 20%, which can add to the cost of your purchase. You may also have a higher interest rate if you have a higher loan to value ratio.
The conundrum for many home buyers is whether to buy now with a small deposit and pay LMI, or hold off to save a larger deposit and try to avoid LMI altogether.
While the latter may seem like the smarter strategy, in a rising market, you might end up paying considerably more for your home by waiting to save a bigger deposit. LMI might just be the ticket to getting your foot in the door, but you need to consider what is right for your needs, budget and the market you’re buying in.
Enlist family help
More Australian parents are helping their children buy their first home by acting as guarantors. The practice has been dubbed the “bank of mum and dad” and it means your parents – or other close family members, if they are willing – can guarantee all or a portion of your loan using their own home as equity.
If someone becomes your guarantor, it means that if you are unable to pay off the loan, they will be held responsible for any remaining repayments.Another advantage of having a guarantor is that you can reduce or avoid paying LMI.
Is there a downside?
There can be a slight downside with this option because it means your parents or family are tied up with your loan until they can be released by either the loan balance being paid down, or if the value of your property rises.
Consider your options
Before you make a decision on which one is right for you, make sure you talk to an experienced home loan expert who will explain all the options and what it means for you. Remember, the smaller your deposit, generally the larger your repayments will be, so make sure you know your budget and are comfortable with your repayments.
To help you find the right deal, make sure you get the right mortgage advice by speaking to an Aussie Broker. A chat with Aussie is cost and obligation free.
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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