It’s harder than ever to purchase a property but that doesn’t mean that it is impossible to save enough for a deposit on a home loan. But first, let’s look at why it’s hard to even purchase a property.
According to Money.co.uk, the average budget (based on an average income of AU$75,000 per annum) for first home buyers in Australia is $339,000, but the average price for a two-bedroom unit is $431,000. This means that first home buyers are working with a deficit of $92,000. So that’s the first thing, saving enough for a deposit has been made more difficult when most incomes are not rising at the same rate as property prices.
This isn’t the only hurdle many first home buyers have to overcome. According to housing finance data from the Australian Bureau of Statistics for February 2021, showed that Australians borrowed $6.93 billion to invest in residential real estate. That’s increase in investment property purchases of 50% from $4.42 billion in June 2020. And in March 2021 the value of loan commitments to investors rose by 12.7%, a 54.3% rise through the year.
What this means is that many first home buyers struggle to compete against investors. The reason for this is because investors typically have something that first home buyers don’t, equity. Investors often use equity from their other property holdings to borrow more money and then outbid first home buyers. This also pushes property prices higher.
So that’s what many are up against, but this doesn’t mean it is impossible for you to buy a home. In fact, you don’t always need a 20% deposit. Let’s take a look at your options.
Home Loan Options
So, a standard home loan will typically require you to put down 20% of the purchasing price of the property as a deposit. So, you’re borrowing 80% of the property value. It’s frustrating but it is necessary as lenders need the deposit as a kind of safety net. It’s a risky business and lenders need to ensure that who they give money to can in fact repay it.
That’s the standard way to do it. If you’re purchasing a property for $500,000, you need a $100,000 deposit. This isn’t even taking into account some of the other costs involved like stamp duty, council fees, legal and conveyancing fess, and Lender’s Mortgage Insurance (LMI).
There are other options though if this isn’t going to work for you.
Low deposit home loans are home loans offered by lenders that let you borrow up to 95% of the property’s purchase price. This loan does incur extra fees and has strict criterion to meet. The benefit of this option is that you don’t have to save as much or have to pay as much upfront. This means you can purchase your home faster than you would be able to otherwise.
The downside is that the loan will take longer to pay off in its entirety and will likely mean that you will incur additional costs, like LMI.
The criteria to meet are strict but to increase your chances of being approved for a low deposit home loan you should:
- Have a good history of paying your bills on time
- Prove that you have some genuine savings
- Remove or minimise any existing debts
- Close your credit accounts
No deposit home loans are also available but are even harder to get approved. This involves getting a home loan with, that’s right, no deposit. But someone has to. This is where most people will use a guarantor in order to receive a no deposit home loan.
A guarantor is a direct or immediate family member (usually parents) that allows the equity in their own property to be used as security for your home loan. The guarantor will typically cover the 20% deposit required of standard home loans.
This is not something lightly handed out by lenders so both yourself and the guarantor must meet a strict criterion.
The requirements for a guarantor home loan include:
- Proof of savings
- Most lenders don’t require proof of savings or a deposit, however, some lenders might ask for proof of 5% of the price of the property.
- Other lenders don’t do this but will analyse your credit score instead
- Ability to repay the loan
- You have to be able to prove that you can afford the loan yourself since the guarantor isn’t a co-applicant.
- Good credit history
- These kinds of loans are considered riskier for most lenders so your credit history is something lenders will check extensively. If you have any missed payments or outstanding bills, ensure that you pay them off before applying.
- Your guarantor’s equity
- The guarantor needs at least 20% of the new property’s value in equity. Some lenders will even go as high as 27%.
- Independent legal advice
- Every lender will recommend that guarantors get independent legal advice, some lenders actually mandate it.
This will allow you a similar purchasing power to investors who may attempt to outspend you on your purchase.
So, there’s some good news and bad news but luckily, the Australian government has a few means of assisting first home buyers purchase their first home.
The First Homeowners Grant (FHOG) helps Australian citizens save up for that elusive 20% deposit. The amount varies from state to state. For 2021 the amount you can receive in each state is:
- ACT – $0
- NSW – $10,000
- VIC – $10,000 or $20,000 for regional Victoria
- SA – $15,000
- WA – $10,000
- TAS – $20,000
- NT – $10,000
- QLD – $15,000
The First Home Loan Deposit Scheme (FHLDS) started in January 2020 partially guarantees some low deposit home loans each year. This means that first home buyers will only need to save 5% of the deposit while also avoiding many of the costs of low deposit loans like LMI. This can then also be used in conjunction with the FHOG to make the process of buying your first home much easier.
So, there you have it. How much of a deposit you might need for a home loan will vary quite a bit depending on your circumstances and if you need assistance in these matters, then our brokers at It’s Simple Finance is more than happy to help. Contact us today if you’re interested in purchasing a property and curious about your options.