How First Home Buyers can own a property with little or no deposit
Before the Royal Commission on Banking forced responsible lending requirements on Australian banks, it wasn't difficult to get a mortgage for 100 percent of the property price.
Unfortunately, for first home buyers with minimum or no savings available as deposit, lenders won’t approve a loan for the entirety of the property value, a.k.a 100 percent lend to borrowers these days.
As with lot of things in lending, there are exceptions to the above, if you qualify of course.
How to get buy a property with no deposit
While responsible lending made it harder to secure a loan for the entire price of a property, it's not impossible. Of course, that doesn't mean that you won't have to have something on the table as a deposit, just that it may not have to be a cash asset.
Today, the most common example of a no-deposit loan is what is called a guarantor loan or as some lenders call it, family pledge loan.
Typically, property is owned by a close relative, such as a parent, uses the available equity in their property as a virtual deposit for yours. And by doing so, allows you to avoid paying lenders mortgage insurance (LMI) or needing cash deposit.
The downside, of course, is that you're effectively bringing your parent or relative along for the ride with your property. In the worst possible scenario, say that you lose your job because of a serious injury and can't make repayments, the bank will look to the guarantors for mortgage repayment or sell the home and then turn to the guarantors to cover any shortfall.
Luckily, a guarantor does not have to be on the loan for the entirety of the mortgage. As the value of the property rises and the loan continues to be paid down, the borrower can apply to remove their relative from being guarantors on the loan – although there may be discharge fees payable.
In general, guarantor loans are ideal for borrowers who have a consistent borrowing capacity and income, but lack the means to gather the deposit by the time they intend to buy.
Check how your home loan compares
The 5 percent deposit
While buyers aspire to offer 20 percent deposit towards their proposed purchase, most first home buyers are lucky if they have 5 percent to contribute by the time they decide to buy.
Usually borrowers can get up to 95 percent of the home price as a loan, but there are some key differences and criteria that need to be met in order to only put down 5 percent of the sale price up front.
For starters, loans above 80 percent LVR are subject to LMI, and the insurance premium depends on the percentage you wish to borrow – for example, a loan for 85 percent of the property price will have a lower LMI premium when compared to a 95 percent lend.
It's also important to note that this insurance is can added to the loan, which means that you will pay interest on it for the life of your mortgage. Alternative is to pay upfront, then of course, you need a bigger deposit.
That said, 5 percent of a home's price is certainly easier to gather than 20 percent, so if you're in a situation where you're comfortable paying a little extra in mortgage insurance, a smaller deposit may be an option to consider.
5 percent deposit plus First Home Loan Deposit Scheme
Starting 1 January 2020, the government is partnered with 27 lenders (most of whom are available on loansHub platform) to enable first home buyers take out a mortgage with a deposit of as little as 5 percent.
Initially the scheme was available to 10,000 first home buyers each financial year, which is about one tenth of the market according to the latest ABS lending to households and businesses figures. However, as part of the 2020-21 federal budget, an additional 10,000 spots have been made available.
What’s good:
· Avoid lenders mortgage insurance.
· Get into your home sooner
· Stop paying rent
· Property prices could rise after you purchase your property.
What’s not so good:
· Higher monthly repayments
· Pay extra interest over the life of the loan.
· Some lenders charge higher interest rates for people with small deposits.
· If rates rise the increase in mortgage repayments will be greater.
· Property prices could drop leaving you with less, potentially even negative equity.
Eligibility criteria
· Borrowers have to earn less than $125,000 a year for singles, or $200,000 a year for couples. Wages are based on your earnings from the last financial year.
· Never owned a property.
· Only for people who intend to live in the home they buy, and pay down their debt.
· You must be an Australian citizen and over 18. Permanent residents can’t apply.
But nothing in life is for free, a person buying a $500,000 property with a 5 per cent deposit instead of a 20 per cent deposit would need $25,000 rather than $75,000 initially, but with a larger loan, their monthly mortgage repayments could equate to and extra $43,546 in interest payments to the bank over 30 years.
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This article via Your Mortgage does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.