As briefly outlined in ‘The Basic Guide to Buying a Property’, the biggest myth with buying property is that you need a 20% deposit. If this was true, it would mean in order to purchase a property worth $400,000 you would need a $80,000 readily accessible deposit. Whilst this is the magic number to avoid Lenders Mortgage Insurance (LMI), there are strategies available for home buyers to get into the market with less than a 20% deposit. This article will touch on a few of these strategies and how they work.
Pay the Lenders Mortgage Insurance (LMI)
If you don’t have a 20% deposit, then you’ll be required to pay LMI. LMI protects the lender in the event that the borrower defaults on their loan i.e. can’t make the scheduled repayments. Say, for example, you have a $40,000 deposit and looking to buy a $400,000 property (10% deposit) your upfront LMI premium would be approximately $6,943 (this will vary depending on the lender). The benefit with LMI is that it can be paid upfront or capitalised into the loan. So, if capitalised it would be added to your loan amount and you’d only be paying interest on the extra $6,943. It’s important to note that LMI depends on several different factors such as:
If you’re a First Home Buyer
What state your property is in
If you’re an owner occupier or investor
The Loan-to-value-ratio (LVR)
Size of the loan
Your job (some lenders have exemptions for LMI)
But is paying the LMI really that bad? Let’s assume a particular situation with the following assumptions:
You start saving $1,500 a month from a balance of $0 starting tomorrow
Property Values increase by 5% p.a.
You’re looking to purchase a $400,000 property
Fees when purchasing the property are 1%
As seen from the above, it would take you approximately 6 years to save enough cash for a $400,000 property (today’s values). Now let’s assume that you save up to an 11% deposit:
As seen, if you were to pay the LMI and purchase the property with a 10% deposit you could buy it in 3 years, rather than 6. By doing this you would make $56,722 ($510,994 – $454,272) in profit as you’ve entered the market 3 years earlier and experienced the 5% p.a. growth on the property. What did it cost you? Only $6,943 in LMI (plus annual interest on this amount). Whilst LMI isn’t an ideal situation, it’s definitely a feasible option for home buyers that are keen on getting into the market.
Get a Guarantor
A guarantor on a mortgage is the person who provides additional security for your home loan. Essentially the guarantor will offer part of the equity in their personal home to top-up your cash deposit to help you, the borrower, avoid LMI. Most lenders prefer a guarantor to be an immediate family member.
Let’s use the above example where you have a $40,000 deposit (10%) and you’re looking to purchase a property worth $400,000 except this time your mum offers to be guarantor. Previously you would’ve been required to pay $6,943 in LMI but as mum has used the equity in her personal home as additional security you won’t be required to pay this LMI as the lenders 20% ‘deposit’ has been satisfied.
Most lenders require that a guarantor receives legal advice to understand their obligations and risks of becoming guarantor and offering their property as security. A few factors that a guarantor should be aware of are:
They may be liable for the outstanding obligation should the borrower be unable to make repayments
Their credit score may be negatively impacted
Their ability to obtain another loan for personal use down the track using equity from their property may be limited
Overall, a guarantor is an extremely effective way for a borrower to get into the market when they may not have the full 20% deposit required to avoid LMI. It’s obviously a luxury to have access to but I’ve found that if in this position many immediate family members are happy to assist.
Take advantage of the First Home Loan Deposit Scheme (FHLDS)
To avoid LMI, the First Home Loan Deposit Scheme (FHLDS) gives first home buyers the opportunity to get a home loan with as little as a 5% deposit. The scheme essentially results in the Government acting as a guarantor (as discussed above) on up to 15% of the property’s value. The following individuals are eligible for the scheme:
Australian citizens over 18 years old
Single applicants with a taxable income of up to $125,000 p.a.
Couples with a taxable income of up to $200,000 p.a. (must be married or in de-facto relationship)
Must intend to be owner-occupier of the purchased property (can’t be for investment purposes)
Must be first home buyers
Once established that you are eligible for the scheme, you’ll then need to confirm the area you’re looking to buy as this will determine the maximum price your property can be. The following table shows the property thresholds:
There are several lenders which offer this scheme, but the government only offers 10,000 places each Financial Year, so as expected demand is high. As a result of this, a bit of planning needs to go into these applications. Each lender has a different process so if you would like to hear more about the process and apply, please contact myself on 0401 225 713 or lmckean@lbkprivatelending.com.au so we can discuss further.
Receive a Gift
Lenders are happy to accept gifted money from immediate family members to a borrower for a house deposit. They will require a gift letter or statutory declaration stating that terms of the gift. Even with the gift, lenders will still want to see at least 5% of the deposit as genuine savings. In summary, these types of savings are those that you can consistently make to show the lender that you have the ability to save. If you’re in a lucky enough position to receive a gift for a house deposit it is an extremely effective method to avoid LMI and get into the property market.
The above strategies show that the biggest myth in property is that you need a 20% deposit to be able to buy a property. If you want to discuss any of the above strategies further or just have a question, please feel free to reach out on 0401 225 713 or lmckean@lbkprivatelending.com.au.
Comentários