Could a Low Deposit Home Loan Be an Option for Your First Home?

Whether you’re just starting to look to buy your first home, or you are looking for an investment property, getting yourself in the the housing market can be a very daunting experience. Many first home buyers are constantly thinking that they need to be saving up to 20% of the purchase price to get a step into the market space. This is definitely true if you’re looking to avoid paying mortgage insurance and drive down the cost of borrowing significantly, but there are plenty of ways to buy with as little as 5% of the purchase price. It's important to keep in mind that there are both benefits and risks involved with this, which is why we've compiled some key points to help you properly consider your options.

What are low deposit home loans?

These are home loans that require extremely low deposits, allowing for people with lower incomes and especially young people to be able purchase their first house earlier. These deposits can be as little as 5%, but require some extra steps or proof that you are a good investment for lenders. The most important thing is to look into finding yourself a Guarantor, someone who promises to repay a debt if a borrower can’t or won’t. Many lenders won’t let you take out a loan without one, especially when using a low deposit home loan. There are a few options when it comes to getting a low deposit home loan:

Option 1:

Proof of savings. Many lenders look at the 5% deposit as ‘hurt money’, that is, money that you have worked for and earned that proves you will be able to pay back your loan on the house. You will need to likely show them ongoing bank statements, for at least the previous 3 months, showing that you are capable of keeping steady and increasing savings from your job.

Option 2:

If you aren’t able to show your savings as above, perhaps because of rent and bills being paid monthly, there is another way to show you are a good investment. You can use the evidence of paying rent through a real estate agent to prove your savings and monetary discipline. You will still need to provide the 5% deposit, but this doesn’t have to be from direct savings, but instead from things such as a gift, a tax return, a bonus from work or the sale of an asset.

Option 3:

There are many options to getting your 5% deposit, and many young home buyers receive it from places other than a job. Consider gifts and other ways of receiving money you can put towards your deposit goal, as well as your superannuation. Using your family’s assistance can help your lender feel safer about investing in you, as you have a backup in case anything occurs and you can’t keep up with payments.

In what situation would I use a low deposit home loan?

If you’re looking to get started in the housing market, but don’t have the savings, or high steady income, it can be a great way to get yourself into the house you want, without needing to worry about coming up with 20% + of the purchase price. They are also used by many property investors who are looking to maximise any benefits they may gain from negative gearing.

Risks of a Low Deposit home loan

Whilst it can be the difference between owning your own home, or continuing to rent a share house, there are some risks associated with low deposit home loans. It can cause higher interest rates, you are effectively reducing your borrowing power, and will need to pay LMI (Lenders Mortgage Insurance)* which can be quite pricey. Top reasons why banks reject home loan applications

Benefits of a low deposit home loan

If it’s your dream to own your own home, and you have both support and the income (or a raise in the works), this could be the perfect way to fast track your way to a first home or investment property. *LMI is an insurance that protects the lender if you (the borrower) defaults on their loan. It is an important fee for lenders, and is only paid if you borrow over 80% of the property value, which is what you will do if you use a low deposit home loan. When deciding if you’re ready to purchase a home, it’s important to consider all of your options. If you need any help figuring out if this is the right step for you, get in touch with one of our experts on 1800 184 284 today to get a comprehensive overview of what you should expect and prepare for.