In today’s evolving economic climate, achieving the dream of homeownership has become increasingly challenging.
As property prices continue to rise, it’s more difficult than ever for aspiring homeowners to save for a conventional home loan deposit equal to 20% of the property value plus costs. The number of first home buyers able to purchase a home with this size deposit fell from 43% in 2001 to 29% in 2022 (source: Helia).
Fortunately, the finance industry and government have responded to these challenges with a number of innovative solutions for people with small deposits.
Gaining significant traction in Australia, low deposit home loans are keeping the dream of owning a home attainable for a growing number of individuals. So what are the options for borrowers with little or no deposit?
Lenders Mortgage Insurance:
Lenders have been able to decrease the amount of deposit needed by a borrower to as little as 2-5% of the purchase price thanks to the advent of Lenders Mortgage Insurance (LMI). This is insurance taken out by the lender on loans over 80% of the property value to protect it against the risk of that the borrower defaults resulting in some financial loss to it. While the insurance protects the lender, the cost of the insurance is paid for by the borrower. The key is that it allows borrowers to buy property with a smaller deposit than otherwise was possible. So both banks and borrowers are winners with this product.
Despite the loan being insured, tighter credit assessment is applied to this category of lending. So a clear credit score is essential, stable employment and income is really important.
While these loans provide access to home ownership with smaller initial contributions, it’s important to note that they may come with higher interest rates to offset the perceived risk by the lender on top of the cost of the insurance. Higher rates mean a borrower will pay more interest over the course of the loan and this impacts on the borrowers available cashflow each month.
Guarantor Home Loans:
This type of loan allows a family member, typically a parent, to use their own home’s equity to provide additional security for your loan.
This can potentially help a purchaser borrow up to 100% or more of the property’s purchase price, thereby removing the need for a deposit at all. At the same time, there is sufficient security for the loan as the lending sits at under 80% of the total security value. So the risk or exposure of the lender is reduced compared to loans that are more than 80% of the property value.
Having the lending at under 80% allows the borrower to avoid LMI and to get better rates than for loans above 80% of the security value. Avoiding LMI can save borrowers up to $50,000 up front while interest rates can be 0.3-1% lower than for LMI loans.
Typically these loans are set up in a way that the guarantor’s exposure is limited to a max of 20% of the purchase price plus costs (in other words the lending above 80% of the value of the property being purchased). However, it is important for the guarantor to understand their obligations (to make the loan repayments if the borrowers cannot or pay off the guaranteed portion of the loan from their own assets which may involve needing to sell the property they have put up as security). Communication and trust between a purchaser and a guarantor is key here as the obligation being taken on by the guarantor is significant.
The Australian Government provides assistance to eligible first home buyers through a number of different programs. These include stamp duty concessions, First Home Owner Grants, the First Home Guarantee Scheme, Family Guarantee Scheme and the Victorian Home Buyer Fund. Here are a few notes on each of these:
Stamp duty concessions vary from state to state but by reducing the stamp duty payable on some first home purchases, this reduces the size of the initial deposit that purchasers need. This concession is typically aimed at First Home Buyers.
Similarly the First Home Grant is the offer of a cash incentive for First Home Buyers in certain circumstance. For example, in Victoria there is a $10,000 grant for the purchase of a new home for under $750,000. The extra money from the government, together with the stamp duty concession, help to reduce the amount required as a deposit for a purchase.
The First Home Guarantee Scheme helps in a different way to the grants/concessions. It is designed to help people to get into homes sooner by removing the need to pay Lenders Mortgage Insurance for purchases where lending between 80% – 95% is required.
There are qualifying criteria such as the purchaser must be an Australian citizen or Permanent Resident and earn income under prescribed levels. Also there are price caps on the property value based on region (for example the max price of a first home in suburban Melb must be under $800,000 for the purchaser to qualify for the program). The other criteria is that the purchaser has genuine savings equal to 5% of the purchase price.
The rates applicable to the loan are then the same rates as for lending at 80%. So the program reduces the contribution required by a purchaser by removing the need for them to pay LMI and then it helps the purchaser get better rates than might otherwise apply. The Family Guarantee Scheme is a similar program targeted at helping single parents except that the purchaser only needs savings of 2% of the purchase price.
The Victorian Home Buyer Funds is a shared equity scheme. An Australian citizen or Permanent Resident with 5% genuine savings and look to purchase a home with the Victorian government contributing up to 25% of the purchase price. The purchaser is required to buy out the governments share over time and the government shares in any capital growth in the property value over this time. There are also income tests and max purchase price limits to meet (as well as a host of other criteria).
At Hatch Financial Services, we understand that the variety of options can be overwhelming.
Our expert team is here to guide you through the process, helping you understand whether a low deposit home loan is the right choice for you.
If a low deposit option aligns with your circumstances and goals, we will assist you in comparing relevant options, ensuring that you choose a product that best fits your individual needs.
Remember, our goal is not only to help you secure a loan, but to ensure that the loan you secure is in your best financial interest.
By understanding your unique circumstances, we can assist you in navigating the world of low deposit home loans, transforming your dream of homeownership into reality.
The Pros of Low Deposit Home Loans
Being able to buy with a low deposit has a number of benefits, hence the rising popularity of such loans. Here are a few key advantages:
Early Entry into the Housing Market:
With a low deposit home loan, you don’t have to wait to save a large deposit before buying a home.
This can get you onto the property ladder much sooner than traditional loans.
Stop Paying Rent:
Rather than spending money on rent, a low deposit home loan allows you to invest in an asset that can appreciate over time, thereby helping you build wealth.
By owning a property, even with a small initial deposit, you start building equity as soon as you begin making repayments and as the property appreciates in value over time.
The Cons of Low Deposit Home Loans
However, low deposit home loans come with their set of challenges that need to be carefully considered. We have already flagged a few of these above as we explained the options but there is also the risk of negative equity. If property prices fall, you could find yourself in a situation of negative equity, where the value of your home is less than the amount you owe on your loan.
These risks underline the importance of obtaining sound advice before proceeding with a low deposit home loan.
At Hatch Financial Services, we can help you understand these risks and guide you in making a decision that aligns with your financial circumstances and goals.
Here to help with all your low deposit home loan needs and questions
Low deposit home loans play an increasing vital role in the home lending market as peoples ability to save a standard deposit diminish. Low Deposit products represent a viable alternative to traditional home loans and offer easier entry into the property market.
However, these loans also come with unique risks and considerations that need to be navigated wisely. It’s crucial to fully understand your financial position, the market, and the various loan options available before making a decision.
This is where professional advice can be invaluable. Hatch Financial Services has the expertise and commitment to guide you through the complexities of low deposit home loans and help you make the most suitable choice based on your specific circumstances.
Remember, buying a home is not just about securing a loan; it’s about creating a sustainable and financially secure future.
With careful planning and the right guidance, a low deposit home loan could be your pathway to achieving your homeownership dream. Whether you’re ready to take the next step or simply want to explore your options, we encourage you to reach out to our team at Hatch Financial Services.
We’re here to answer all your questions and assist you in navigating the world of low deposit home loans.
Let’s transform your dream of homeownership into reality together.