How to buy a home with little or no savings

For many would-be aspiring homebuyers, saving a 20% deposit for a mortgage can be a big barrier to homeownership. And unless your parents are funding your deposit, most people are buying homes by putting as little as 5 percent of the purchase price as their contribution.

Having the full 20% deposit when taking a home loan ensures you won't pay lender mortgage insurance (LMI) premium and will most likely get a competitive interest rate from your lender.

When property values are increasing 2-3x the rate of wage growth, the benefits of making a smaller deposit contribution when buying outweigh the consequences — it can help aspiring homeowners, buy their home and build wealth and equity sooner rather than later.

With the average price of a house in east coast capitals hovering well over $750,000, saving 20% deposit for a home purchase is daunting, and rightfully so.

For many young Australians struggling with higher cost of living, and relatively stagnant salaries, saving a fifth of a home's value to get a mortgage simply isn't possible without their parents contributing.

Aspiring homebuyers are finding it can take years to save a full 20% down payment, especially for anyone living near a major capital city, where real-estate prices are soaring.

ANZ’s 2019 housing affordability report found, it took 11.4 years in Sydney, 10.1 years in Melbourne and 7.9 years in Brisbane to save 20% house deposit. It would be fair to assume that these saving times have completely blown out since then as house prices have grown on average by 3.41% since 2019 while wage growth in real terms has fallen to negative figures.

And for many millennials in particular, saving 20% deposit is just not feasible. Which has made the practice of contributing less than 20% to secure a mortgage normal, and it's also practical solution to get their foot into the market quicker.

Buyers traditionally want to contribute at least 20% in-order to secure lower interest rates and avoid paying LMI. For home buyers without 20% deposit, paying LMI can equate to an extra 0.3% - 1.2% monthly repayment on the loan's principal balance.

In cities where homes are increasing in value quickly, paying LMI might be worth it in-order for you not to miss out on a property boom. Unfortunately, in Australia lenders require LMI to be paid upfront through a one-off payment at settlement.

You can however either pay for this out of your own pocket or add it to the loan if the LVR is low enough. The only downside of paying a large one-off LMI is, in a hyper growth market, your property value may increase significantly enough in only a few years for you to have 20% equity in it.

As for interest rates when you contribute less than 20% of the purchase price as deposit, the rate you get may be slightly higher than what someone is offered when borrowing 80% or less of the property price.

The upside of property markets experiencing hyper growth, it’s also possible to refinance your loan a lot earlier to get a more competitive interest rate on your mortgage, though you'll be aware that property values can go down as well.

Of course, if you don’t have any savings and you have parent’s who are willing to chip in the required 20% deposit or use the equity available in their home to go on your loan as guarantors in lieu of 20% cash deposit, you will not incur LMI cost when purchasing your home.

The good news is, once your loan balance is 80% of your property’s value, you can refinance and remove your parents as guarantor, freeing them from being liable for your debt.

Regardless of you paying LMI or using guarantor when purchasing, focus on your repayments, not how much deposit you contributed if you want to pay off your home loan quickly. To learn more about paying off your home loan quickly, click here.

Accumulated equity in property is still the major component of wealth for Australians who aren't cash rich.

So, when deciding if you have enough deposit for a home loan, as long as you can afford to pay that potentially higher repayment at 5/ 10/ 15% deposit — versus 20% deposit — get yourself a pre-approval with loansHub and buy that dream home.

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This article via 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.