For many Australians, trying to save up for a 20% deposit is becoming harder and harder to do, but luckily there are alternatives out there. Low deposit home loans can be applied for like any other mortgage and some lenders can even offer low deposit home loans with a deposit as little as 3% of the purchase value of the property.
Depending on the lender you could purchase a property with a low deposit of:
- 10% or
Anything less than a 20% deposit is considered a high-risk loan so there are strict criteria you have to meet in order to be eligible.
Checking Your Eligibility
There are several things to look out for when checking your eligibility for a low deposit home loan. These include:
- Credit History
- You need a clean credit file. There can be no black marks in your credit history. So, if you have missed repayments on any previous personal loans, credit cards, or rent, you may be rejected. This is not as much of an issue with some lenders who are less strict with at deposit of at least 10%.
- Your Income
- If you have maintained a steady job with stable income, this will look very nice on your application as you will considered far less of a risk in comparison to someone who works sporadically.
- Genuine Savings
- It doesn’t matter how small the deposit is, lenders will require some amount of genuine savings. Many banks will reject your low deposit home loan outright if you don’t have at least 5% of the purchase price in savings. This isn’t a rule for all lenders though.
- Level of Debt
- If you already have a debt over 5% of the purchase price of the property, it will be more difficult to get a low deposit home loan approved. If you have any unsecured debt like from a personal loan or credit card, remove that debt as soon as you can to improve your chances.
Improving Your Credit Score
If you are worried about your credit score there are ways to try and improve it. These strategies are simple and include:
- Attempting to pay all your bills on time and in full
- Settling any outstanding balances you have
- Avoiding overdrawing your credit cards
- Limiting how often you apply for credit cards and loans
For savings to be considered ‘genuine’ they must be in the following forms:
- Regular deposits into a savings account over a three-month period
- Shares or managed funds held for three months
- A term deposit held for three months
- Some lenders can accept equity in another property
It really depends on how big your deposit is though:
- 3-5% deposit: almost all lenders will require genuine savings
- 10-15% deposit: most lenders will require genuine savings
- 15-19% deposit: genuine savings not required from most lenders
The Advantages of Low Deposit Home Loans
- Allows you to actually get into the property market, making low deposit home loans favourable for first home buyers. These loans also allow you to react quickly to opportunities that present themselves in the market.
- Your money is going towards your own mortgage, rather than rent. Over time this will mean your financial position will increase in strength as you will own an expensive asset and be able to improve your credit rating by making your repayments on time and in full.
- You can start generating wealth. The more you pay back on your mortgage, the more equity you build up. The more equity you build up, the more you can use to borrow against at a later date, meaning you may be able to purchase an investment property or something similar.
The Disadvantages of Low Deposit Home Loans
- Interest rates can be higher. This is due to the riskier nature of low deposit home loans. When someone purchases a home with a 20% deposit, it’s likely that if they default on their repayments, the lender will get their money back from selling the home. The same cannot be said of low deposit loans, hence they must charge higher interest rates to make up for the added risk of losing money.
- Lender’s mortgage insurance (LMI). This is also due to the higher risk involved with a low deposit home loan. If you don’t pay this upfront, it can add to the cost of the loan.
Guarantors are a direct or immediate family member that allows the equity in their own property to be used as security for your home loan. This guarantor can be used to cover the entire deposit or just part of it. This is a common option for many first home buyers. There is also a strict criterion to be eligible for these loans as well. Contact one of our brokers to find out if this is right for you.
No Deposit Home Loans
There are options for no deposit home loans but these are even more difficult to get than low deposit home loans. You must use a guarantor for this as there is no lender that will allow you to borrow 100% of the purchase price of the property plus the additional fees.
Speak to one of our brokers today if you are interested in a low deposit home loan and get on the fast track to buying your dream home.