03 Jun Getting into the market with a small deposit
After a record run of house price growth across Melbourne, many new home buyers might feel a little unsure about how they are going to afford a deposit on a property.
While lenders typically want to see a borrower provide a 20 per cent deposit, the good news is there are a range of low deposit options available to help home buyers enter the property market.
Lenders Mortgage Insurance (LMI)
If you need to take out a home loan and you’re not able to come up with the full 20 per cent deposit you will likely be required to pay Lenders Mortgage Insurance (LMI).
LMI is a one-off, upfront premium paid by the borrower and put in place to protect the lender, in the event the borrower is unable to meet their repayment obligations.
The big advantage of LMI is that it allows a borrower to purchase a property without having a large deposit saved. Over the last few years, we’ve seen that home prices have been rising faster than people have been able to save for a deposit. LMI can get you into a property quicker which can allow you to start building equity in your property and not chasing your tail.
However, there is a cost to take out LMI and this differs depending on how large the loan is and how much of a deposit you are able to put down.
Home Guarantee Schemes
In recent years, the Federal Government has launched a range of schemes aimed at helping first home buyers enter the property market.
First Home Loan Deposit Scheme is an initiative that offers first home buyers the ability to buy a home with as little a 5 per cent deposit. Typically a home buyer with a small deposit would be required to pay LMI, however, the Government effectively guarantees the 20 per cent shortfall, which lets the borrower avoid the upfront LMI cost.
The Federal Government has also recently launched initiatives aimed at helping those looking to buy in regional areas as well as schemes aimed at helping single-parent families, who are not necessarily first home buyers.
There are also other programs such as the Australian Government’s First Home Super Saver Scheme, which allows eligible borrowers to access their superannuation to use a deposit to purchase a home.
Another way to purchase a home without having a large deposit is with the help of a family guarantee. A guarantor loan works with the help of a family member who provides equity in their home to help make up the deposit shortfall.
This is normally the way a family member, such as your parents, would help a first home buyer get started purchasing a home.
Fortunately, there are now a number of ways to purchase a home without a large deposit so home buyers can get into a property sooner rather than later.