Low Deposit Home Loans: Is This The Right Mortgage for You?
It can take many years for an average working individual to save money to use as a deposit for a home loan. Considering other living expenses and debts, the likelihood of an individual to invest in real estate seems too far from possible. As real estate rates continue to rise every year, many individuals can be disheartened from chasing their dream to own property because it becomes financially difficult for them.
Four bedroom houses in Forestdale, Western Australia has a median price of AUS 1.8 million, a 26.4% growth from last 2017. Compared to 4-bedroom homes located in Deebing Heights. QLD, prices have increased by 21.6% but home prices are at AUS 465,000 on average. With home prices on the upward turn in terms of prices, regardless of what State you are located, having enough money to secure your first home can be really challenging.
If you are a first time home buyer or if you have a tight budget and find it hard to save for a home loan deposit, then low deposit home loans can be just right for you. These type of home loan will allow you to borrow more than 80% of the property value. Let’s look further.
What are Low Deposit Home Loans?
Low deposit home loans, also referred to as high Loan to Value Ratio (or High LVR) loans. Such home loans are designed for individuals trying to avail of a home loan but not able to meet the standard 20% deposit. This type of loan can allow 5 to 15% deposit. However, expect the interest on the loan to become higher compared to the total value of the home.
While loan companies can offer to fund about 95% of the home value, that price is normally regarded as high risk. Consequently, potential borrowers are thoroughly checked out on their fiscal position and capacity to make monthly payments while living a comfortable lifestyle.
July 2018 revealed a record drop of 44% in terms of banks and lenders offering 95% home loans. Tighter restrictions for high LVR loans from the Australian Prudential Regulation Authority (APRA) is one of the significant reasons for this, thus making it harder to secure low deposit home loans. However, with the right mortgage experts, you can still secure a 95% home loan. Intellichoice Finance connects you to this few, but reliable lenders that still offer low-deposit mortgages.
It is important to note that even if these loans make it more affordable for future homeowners, monthly repayments and interest rates are higher compared to regular home loans. Also, there are fewer banks and lenders willing to provide loans with lower deposits. But this is certainly not always the case. There are some borrowers who can still get the same rates as a regular home loan and can even get access to better terms and deals.
Read further to help you decide if this type of loan is the right mortgage for you.
Benefits of Low Deposit Home Loans
- Up to 5% of the property value minimum. While standard home loans may require you a down payment of about 20%, low deposit loans can go as low as 5% minimum deposit. Imagine if you can make a $25,000 deposit vs $500,000 deposit. This scenario is a huge relief to many borrowers while it’s a quick route to owning a property of your own.
- Using a guarantor. By using your parents’ or any family members’ or friends’ property (should be with the consent of the guarantor) as security to take out a loan, you can get a better chance of approval and be gaining the lender’s attention. This is because you have a guarantee to offer and lenders are assured that they are able to get their money’s worth.
- Using a guarantor could additionally help you avoid extra payments for Lenders’ Mortgage Insurance that may soon add up to a large sum of money. Note though that when you get a guarantor, there should be a common understanding of the consequences in case the borrower defaults on payments.
- Also, by using a guarantor with good credit, you may also have access to better terms such as regular interest rates and features like regular home loans.
Drawbacks of Low Deposit Home Loans
- Considered a high-risk borrower. Loan companies consider loans with low deposit as high risk. Therefore, they demand sufficient proof that you are financially capable to make repayments. This loan may also demand higher interest rates and may result in higher monthly repayments.
- Typically, loan companies will request borrowers to provide a savings account statement that covers 3-6 months of deposits. This requirement is called genuine savings. Loan companies would like to see regular deposits that the borrower has managed to save at least 5% of the total property value.
- Lenders’ Mortgage Insurance (LMI) and other fees. One of the drawbacks of low deposit home loans is the additional costs on Lenders’ Mortgage Insurance (LMI). This insurance is to safeguard the loan company from any kind of problems if the borrower defaults on repayments or not pay at all. Note that LMI is non-transferable so that if you decide to switch lenders the previous LMI cannot be used by the other. There are also other fees that you need to pay such as application fee, settlement fee, service fee, and some other charges.
By looking into the benefits and drawbacks of Low Deposit Home Loans, consider your options. Is this the right mortgage for you? If you are not quite sure yet, contact a mortgage broker to get professional advice.