Options For First Home Buyers With Less Than 20% Deposit
First Home Buyers
Most lenders require a 20% deposit otherwise you will need to pay lenders mortgage insurance (LMI). LMI can be very expensive and it only protects the bank, not you (no surprises there). It basically protects the bank from any shortfalls if they needed to sell your house quickly. Let’s say you owe $500,000 and they sell your house for $480,000, Lenders Mortgage Insurance will cover the $20,000 shortfall. Make sense?
Saving a 20% deposit for a home loan is a huge ask for most people. So are there any other options? Yes there are. Let’s look at a few.
Low Deposit Home Loans
There are some lenders that will accept a 5% deposit. You can then borrow the Lenders Mortgage Insurance on top of this. So effectively you are borrowing up to 99% of the value of the house including LMI. However, these loans can carry a higher interest rate especially if you borrow above 95% of the value of the house.
This is a good option if you would like to get into the market quicker. After a couple of years, you might be eligible to refinance into a cheaper loan too.
Guarantor Loans
With a guarantor loan, you can borrow 100% of the purchase price. A 20% deposit is secured against the guarantors property and 80% is secured against the property being purchased.
Guarantor loans help the purchaser avoid paying lenders mortgage insurance but does come with risks for the guarantor. The guarantor is ultimately responsible for the loan should the purchaser stop paying the mortgage. Fortunately, guarantors are only liable to repay the amount they guarantee (usually 20%) and once that amount is repaid, they are released from further liabilities.
First Home Loan Deposit Scheme
Under the scheme, buyers taking out their first home loan will be able to gain finance with a deposit as little as 5 per cent, with the government acting as guaranteeing the difference (in this case 15 percent) of a standard down payment.
Buyers will still have to pay the remaining 15 percent, as they are technically borrowing 95 percent of the property’s valuation from a lender.It’s currently still a draft, but if it is approved by all stakeholders by November 4 it will come into effect from January 1, 2020.
The government has set out purchase thresholds for each state and territory to create an even playing field. See below:
Large regional centres are defined as having a population over 250,000 people. The would include places like Newcastle, Gold Coast, Lake Macquarie and Geelong.
To meet the scheme, first homebuyers will have to meet a whole raft of eligibility criteria that essentially tests their means. Only singles who earn a taxable income of up to $125,000 a year will be able to access the scheme, while only couples with a combined taxable income of $200,000 a year will be eligible.Inheritance is not taxed in Australia, but the eligibility criteria may assess a person’s current access to cash.
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