Do you worry about buying your own home because of concerns about raising a deposit? Low deposit home loans could be the answer you are looking for.
Before deciding if 95% home loans are right for you, it pays to know as much as you can about them. Taking out a mortgage is a big step.
Here’s a primer on low deposit home loans and the key information you need to know whether they are right for you.
And before we start, here's a little disclaimer. All information provided herein are for references only. If you need our advice about taking up this type of loan, please call 1300 992 260 or email [email protected]
What is a Low Deposit Home Loan?
Most house loans require a deposit equal to 10 to 20 percent of the property’s value. This means you are only able to borrow 80 to 90 percent of your home’s value against the property.
Low deposit home loans allow borrowers to secure funds up to 95 percent of the property’s value. These loans were very popular, although creditors have now imposed stricter regulations on them in response to the higher default rates for these loans.
If you are applying for a 5% deposit home loan, lenders are likely to ask for more documents to prove your capacity to pay. Lenders try to compensate for the higher risk by imposing a stricter evaluation process. In some cases, the creditor will also make you pay for Lender’s Mortgage Insurance.
Is a Low Deposit Home Loan Right for You?
Anyone can take advantage of a low deposit home loan. However, they tend to be more popular among property investors and first time home buyers. Low deposit loans can also help families buy a home without having to wait until they have saved for a large deposit.
If you are buying a home for the first time, you might be able to take advantage of some government incentives. The First Home Owners Grant, a tax-free government payment which can be as high as $7,000, can help you offset some costs if you are eligible. You can find the details on the First Home website. There may be additional concessions depending on the state or territory where you plan to purchase a new home.
What if your deposit is still insufficient after those benefits?
Read on to learn more about what low deposit home loans have to offer.
Some people use home loans with 5 percent deposit because they can’t afford a larger deposit. In addition, property investors are opting for these loans as part of their negative gearing strategy. Australia is one of the countries where investors can claim a tax deduction for the difference between income earned from property investments and the interest due on the same property.
Why Should You Consider A Low Deposit Loan And What Do You Need To Know?
A smaller deposit means you will also have to pay more on your loan in the long run. Interest rates for low deposit loans can be higher but if you expect your income to become higher in the future and you are confident about making payments in time, this loan might be the quickest route to owning your first home.
If you also have plans to pay off the loan before the end of its term, then a low deposit loan can be a good option. In this case, however, you also need to check for any fees related to paying the loan off early.
If you are a pro in real estate investing, then these loans could be advantageous for you.
In a nutshell, the low deposit loan works if you have a strategy. Otherwise, you should steer clear of these loans to avoid ending up with a bigger debt than you anticipated.
If you don’t have a firm strategy and you are just itching to get out of a cramped space, this loan may not be suitable for you. The same goes for newcomers in the real estate market.
Taking out a loan which you may not be able to afford can hurt your credit score. While defaults do not always act as a bar to taking out credit, such situations should still be avoided. In some cases, it may make more sense to save for a few extra months in order to minimize the amount you need to borrow on your housing loan. Doing this can also help you secure better interest rates once you do have enough savings for a deposit.
How Small Can My Deposit Be?
Among the biggest questions people have is whether it is possible to take out a home loan without any deposit at all. Unfortunately, the answer is no.
For those who are struggling to save the necessary funds for a deposit, other options might include:
- Parental Gifts. If your parents are willing to give you funds to cover 10 percent of the property value, then you can put your money into improving the property instead of saving towards a deposit.
- Ask Your Parents to be a Guarantor. Another option that might be open to you is to enter into a guarantor’s agreement with your parents. You can borrow up to 100 percent of the property’s purchase price using your parents’ equity. When entering into this type of agreement it is essential that you understand all the terms and conditions for both you and your parents.
- Use Equity from an Existing Property. You can borrow up to 100 percent of the property’s purchase price by using equity from another property you own even if you have no genuine saving
- Personal Loan. While it may be tempting to take out a personal loan in order to raise a deposit, it is better to steer clear of this option. This is a risky strategy since personal loans tend to have higher interest rates than home loans. Unless you need to purchase a home urgently, and you are able to pay off the personal loan in a month or two, this option will increase your debts and place you under increased financial pressure.
What Fees Do I Need To Pay When Taking Out A Home Loan With 95 Percent LVR?
When you take a low deposit home loan, it is important to take into account all of the related costs. Here are some of the items you also have to budget for.
When you file mortgage documents for your property, you need to pay stamp duty. This is a state government tax, and the amount will vary from one state to another. Check the computation for your state to see an estimate of the total costs.
When you transfer the ownership of a property from one person to another, there is a processing fee involved. You will need to pay for the services of a solicitor or a conveyancer for this process. While conveyancers may have lower fees than solicitors, remember that solicitors can also provide legal advice. Additional costs in this process include the cost of the title search in order to verify the legal owner of the property and the property type before you make the purchase. This is to safeguard you against fraudulent transactions, in which the sellers of the house are not the actual owners.
Lender’s Mortgage Insurance (LMI)
If the amount you plan to borrow against the property is more than 80 percent, you may be required to pay for LMI. Many creditors will require this to offset the risk of lending money to you. Be sure to check the terms of the loan to see if this is a requirement.
Home and Building Insurance
Among the requirements creditors usually have is for the purchaser to take out building or home insurance. If you plan to occupy the property, it is also advisable to take out home contents insurance. The number of costs for insurance will depend on the type of property and other factors.
Aside from all these considerations, you also have to think about how much you will spend on renovations of the new property, new furniture and moving costs. The actual cost of whipping the property into shape and transporting your belongings can add up quickly.
Pest and Building Inspection Costs
Inspecting the property is another cost that most people fail to consider when taking out a loan. While inspections will cost you in the short term, they can help you avoid buying the wrong property which would have a much greater cost in the long term. In most cases, an inspection will cost around $500.
What’s the Catch?
A home loan with 95 percent LVR may sound like a perfect solution for those who can’t raise a 20 percent deposit. There are many advantages to these loans, but it is also important to bear in mind the following points:
- Lenders are stricter.
Loan approval for this type of application is stricter. You will need to have a clean credit history, a stable job and a genuine savings account. In addition, having other assets can be helpful, as the lender needs to be satisfied that you have the ability to meet your payment obligations.
- Guarantors are wholly and severally liable.
If you have a guarantor for 20 to 30 percent of the property’s purchase price, you will not need to take out a mortgage lender’s insurance. However, the guarantors will have full responsibility for the loan if you fail to make payments.
Most of the time, guarantors are parents of the borrowers. Regardless of who the guarantor is, it is crucial to discuss the implications of being a guarantor and ensure that all parties are aware of their obligations and liabilities.
- Lender’s Mortgage Insurance is a Must
For a low deposit loan without a guarantor, you will need to take out this insurance. The amount of the insurance premium typically equates to around three percent of the loan amount. For a $500,000 loan, for instance, the insurance will cost around $15,000.
While this is a significant amount, the good news is that you can capitalize the insurance as part of the property’s value.
Banks or Mortgage Brokers?
If you are taking out a loan for the first time, you might be wondering who to approach - a bank or a mortgage broker. Both are good options, but it pays to know exactly what each professional can help you with.
If you want to do business with a particular bank or lender, you can approach them directly. Banks have members of staff who can guide you through the entire process and help walk you through the best credit options for you. They can recommend products that would be most suitable for your needs and financial situation but will be limited to the products offered by that particular bank.
A mortgage broker is someone who can assess your creditworthiness and financial capacity. This professional will also give you a clear picture of what you can expect to be able to borrow based on your personal profile and circumstances. A mortgage broker is familiar with the loan application processes of several lenders and can recommend products from a range of different credit providers, offering more choice to their clients.
If you don’t know the best options available on today’s market, a mortgage broker can help you shop for the best rates and can even negotiate on your behalf. Your chances of getting approved can be greater with the help of a mortgage broker who is familiar with lots of different products. It is important to choose a broker you can rely on, and it can be helpful to ask for recommendations from friends and family. (Or inquire with us, inquiries are free. :))
Low Deposit Home Loans – Let Every Dollar Count
Buying a property is a major decision, and you need to keep your eyes wide open throughout the process. It doesn’t matter whether this is your first loan or not, you still need to learn as much as you can before taking out a loan.
Find a Better Rate (Mortgage Broker Melbourne) understands how gruelling the entire process is. We can help you find a low-cost home loan that suits all your requirements and allows you to stay within your means when buying a home.
- Maximum LVR 95%
- Owner-occupier and Investor
- Professional Investor
- Interest Only
- Principal and Interest
- Additional Repayments
- Repay monthly, fortnightly, weekly
- Gifted Deposits
- Borrowed deposit funds
- Non-genuine savings
- Valuation Fee
- Application Fee
- Ongoing Fee
- Settlement Fee
- Discharge Fee
- Professional fees
Why Choose Us?
We will connect you with reputable lenders and find the best fit for you. Here are more reasons why doing business with us will save you from financial headaches.
We do not charge any fee from clients. Our brokers are paid on a commission basis by the lender and we will always disclose to you the amount of commission we receive. The entire process is open and transparent, ensuring that you know exactly what you are paying for.
We know the ins and outs of the industry, and we have a network of professionals to help you find affordable loans within your budget.
Our friendly advisers will explain everything to you in a language you understand. We want our clients to have all the information they need before taking out a loan and we are here to help and to explain all the technical terms and jargon.
We love technology, and we always upgrade our services to provide you with the resources you need instantly.
How Does It Work?
If this your first time doing business with us, here’s a quick guide to help you.
Step 1: Consultation
Get in touch with Find a Better Rate, and we will evaluate your eligibility for low deposit home loans.
Step 2: Options
Our mortgage broker will provide you with available options.
Step 3: Application
We will submit your application to lenders for your chosen product.
Step 4: Approval
Once your application is approved, it’s time to look for the home of your dreams.
Get a Rate Estimate
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