Laura Akhurst - 5 Jul, 2017

Low Deposit Home Loans: The Good and the Bad

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With changes to lending guidelines, many lenders now expect a 20% deposit when you apply for a home loan. They also like to see a minimum of 12-months savings to prove you’re able to manage your finances well. However, saving a 20% deposit can seem impossible, especially now the median home price has risen to $600,000. Meaning you’ll have to find $120,000 as a deposit. Nevertheless, there are ways to get into your home faster. Popular options are guarantor and gifted deposits, and the low deposit loan. Let’s look at these now.

The Guarantor Loan

You do not need a deposit if your parents have equity in their property that can guarantee your loan. This type of loan means that instead of paying a deposit, a lender will use your parent’s home as security. Therefore, if you default on your home loan payment, your parents will become responsible for your repayments. If they cannot manage the repayments themselves, then the lender will foreclose on both properties to recoup their initial investment.

The Good

Guarantor loans are popular with first-home buyers and allow you to borrow up to 110% of a property’s price. Plus, once you’ve paid more than 20% off your loan, you can then apply to have the guarantee removed.

Other benefits include:

  • Reduced guarantor risk – Some lenders will allow you set a size limit for a guarantee. Utilising this strategy means that only a part of the guarantor’s property is at risk.
  • Avoiding Lenders Mortgage Insurance (LMI) –  Depending on the property price, you may avoid paying this insurance, which can add tens of thousands to costs.

The Bad

You need to calculate your home loan repayments before you sign a loan agreement. Otherwise, over committing could put your parents at risk financially, and they may lose their home. Also, various lenders will require you to save at least 5% of the loan’s cost in genuine savings. This act ensures that you’re able to manage repayments.

Another alternative to the Guarantor Loan is a gifted deposit, where your parents gift you between 5 to 20% of the loan’s deposit. When using this option, a lender requires a ‘gift letter’ to prove the money is not from another loan source.

The Low Deposit Home Loan

Certain lenders will allow you to borrow more than 80% of a property’s value. But, these loans typically require you to have saved a minimum of 5% towards the purchase of the home. Consequently, savings must also be genuine, meaning that the amount cannot be gifted, won, or inherited. Instead, you must have saved the money over a number of months or years.

The Good

You’ll be eligible for a low deposit home loan if you have:

  • A stable credit history
  • Long-term employment
  • Reasonable income
  • Assets
  • Minimal debt

Many lenders will also look at the property type and location to ensure it’s a sound investment. Loans for property in regional areas, the CBD and unusual property is harder to secure.

The Bad

Usually only owner-occupiers can secure a low deposit home loan. Investors will need another property or asset as security if they want to reduce their capital outlay.

Furthermore, you may also have to pay LMI, which protects a lender against loss if you default on your loan. On a $600,000 property, let’s say you borrow $570,000, which attracts a 2% LMI of $11,400. With this cost being considerable it would leave you with little or no equity in your property.

Overall, when looking at finance options, always consider your budget and if you can afford to make repayments. Moreover, always check your borrowing capacity, and do your own independent home loan research.

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