We understand that saving for a first home deposit isn’t always easy – especially if you’re already paying rent on a place to live. But don’t give up on your goal of buying a first home! There are solutions that can get you into a place of your own even when your deposit is a little on the lean side.
Busting the 20% deposit myth
It’s true that lenders like to see a deposit of at least 20% of your property’s purchase price.
However, it may be possible to buy a home with much less. Some lenders may offer loans of 90% or even 95% of the property’s value which means you could potentially get into the market with a deposit of 10% or even 5%.
What’s the catch? Hint: it’s LMI
The amount you borrow relative to your home’s value is known as the ‘loan to value ratio’ (LVR). A high LVR means you owe a large amount of money compared to the amount you put down as a deposit. We have a deeper explanation of LVR, but the main takeaway is this — if you have a high LVR, you pose a greater risk to the lender.
If your LVR is higher than 80%, your lender is likely to charge you Lenders Mortgage Insurance (LMI). This protects the lender from risky loans held by borrowers with low deposits. The only way to save costs on LMI is to put down a deposit over 20% — hence, the 20% rule.
Having a low deposit and paying LMI isn’t the end of the world for some people, in fact, there are a few circumstances where a low deposit might make sense. However, this can mean more expenses and it’s a good idea to consider your unique circumstances before making a decision.
How’s your credit record?
When you have a very small deposit, between 5-10%, both the lender and LMI insurer will take a good look at your credit record. Any problems may result in a “please explain” from the mortgage insurer. You’ll want to make sure you have your financial records in order to justify your application. You can talk to your local Auspak Broker if you need help with organising your loan application paperwork.
Upfront costs, grants and other options
Buying your first home costs a lot more than the initial deposit – but there are other upfront and ongoing costs too. These include stamp duty, conveyancing fees, removalists and council rates. If you’re unsure about the additional expenses when buying a home, we can help you work it out.
If you’re a first homebuyer you may be eligible for the First Home Owner Grant or stamp duty savings, which could help with your home buying budget. It’s also worth doing some reading to see if you’re eligible for schemes which may help you out financially.