Many home buyers assume they’ll need a 20% deposit before they can apply for a home loan, but that’s not necessarily true. Features such as lenders mortgage insurance (LMI) and family guarantees mean that some lenders may let you buy your home with a much smaller deposit than you might think.
When it comes to saving for a home deposit, you’ll often hear people bring up a minimum figure of 20%. In other words, if the purchase price of your home is $500,000, many people will tell you that you need to have a deposit of $100,000 saved before you can apply for a loan and purchase your home. But that’s not always the case.
While it’s correct that most lenders generally like to limit their exposure to a loan-to-value ratio (LVR) of 80% – which means that they’d expect you to pay 20% of the purchase price of the property – in some cases you may still be able to satisfy a lender’s risk criteria, even without having saved 20% of the purchase price.
What if you don’t have a 20% home loan deposit?
One way a lender may let you overcome a small deposit is by giving you the option of paying for lenders mortgage insurance (LMI). LMI is insurance that protects the lender if you can’t meet your mortgage repayments and default on your loan.
With LMI, a lender will sometimes let you take out a home loan if you have as little as 5% of the home’s value if you’re an owner-occupier, or 10% if you’re an investor. That way, for the same $500,000 property, you could need as little as a $25,000 deposit if you’re buying your own home or $50,000 if you’re an investor. Don't forget that you will also need to have enough to cover fees such as stamp duty and mortgage registration on top of your deposit. See below for more information.
That said, if you do use the option of paying LMI, you will bear its cost – not the lender. That means your home loan will be more expensive too.
Another alternative: family guarantee
Another option some lenders offer to home buyers is the chance to use a family guarantee. A family guarantee allows a close family member such as a parent, grandparent or sibling, to use the equity in their home to provide additional security for your loan, thereby giving the lender extra protection.
Unlike a full guarantee, a family guarantee usually only requires a guarantor to provide security until a particular threshold is reached. For instance, if you have a five percent deposit, your lender may allow you to use a family guarantee to provide 20% security so that the equity in the guarantor’s home provides the remaining 15%.
Once you’ve paid down enough of your loan to reach this threshold – or even if the market rises enough so that your LVR is now only 80% – you can usually have the family guarantee released.
The benefits and disadvantages of a family guarantee
Because it offers additional security, a family guarantee may allow you to borrow more than you otherwise could. You may also be able to reduce the amount of LMI you need to pay, or possibly avoid it altogether. However, your lender will still want to make sure that you can meet your repayments and will assess your capacity to repay any loan.
If you do choose this path and you have a family member willing to help you out, they should always be careful to get their own independent financial and legal advice before signing anything. After all, if you default on your home loan the lender may ask them to provide the guaranteed portion of your loan.
Other upfront costs you shouldn’t forget
While your home deposit may be the largest cost you’ll need to pay when you buy a home, there are some other upfront costs you’ll need to cover also. These can include stamp duty, pest and building inspections, legal or conveyancing fees, removalists costs and more.
Of these, it is stamp duty that usually represents the largest cost. Although, in many States and Territories, you may be entitled to a stamp duty discount if you’re a first home buyer.
You will also usually have to pay most of them at, or around, the time your property settles. That means you should always budget for saving for these, as well as any deposit.
When it makes sense to buy a home with a small deposit
Finally, while a bigger deposit usually ensures you need to borrow less, it’s always worth remembering that there are times it may make sense to purchase a home with a smaller deposit. This could include where saving a large deposit isn’t realistic, or where the market is rapidly rising and saving for a larger deposit could cost you extra money and mean you need to save even more.
Note. The information provided above is general advice. For advice specific to you and your situation speak to Citrus Finance before deciding on the best course of action.
Original article from realestate.com.au
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