What if I don't have a big enough deposit?
If you’ve read our guide and saving a deposit still doesn’t seem feasible, you don’t necessarily have to throw in the towel on your homeownership aspirations. You might just have to get more creative in how you go about achieving them.
First of all, you should know that there’s no shame in coming to the conclusion that saving a 20%, or even a 5%, deposit just isn’t workable. After all, if you live in Sydney, a 20% deposit for a median-priced dwelling of $872,300 would be $174,460, not even taking into account stamp duty. Even a 5% deposit would set you back $43,615, and then you’re on the hook for lenders mortgage insurance.
For some of us, that’s simply not possible. That’s OK. Here’s a look at how to get into the property market if a home loan deposit in your city is out of reach.
Rentvesting is the concept of entering the housing market as an investor while continuing to rent or even live at home. Sure, this still means you’ll have to save a deposit, but it could be a significantly smaller deposit.
For instance, let’s look at our example again. If you live in Sydney, that $174,460 deposit is pretty daunting. But what if you decided to invest in a market like Hobart, which has seen 5.8% price growth over the last year? The median dwelling price in Hobart is a much more affordable $350,000. In this scenario, a 20% deposit is going to set you back $70,000, while a 5% deposit is a much more manageable $17,500.
Saving $17,500 is a lot less scary than saving $43,615.
How rentvesting works
1. A home deposit is too expensive in the city you want to buy in. In this example buying in Sydney will require a deposit of $176,460.
2. The buyer instead purchases an investment property in Hobart, requiring a deposit of only $70,000, and then rents and lives in Sydney.
The idea behind rentvesting is you can use your investment to generate cash flow, and eventually sell it for a capital gain. If your capital gain is strong enough, you might be able to use it as a deposit on a house you actually want to live in.
Before you dive into rentvesting, there are a few things to keep in mind.
First, you need to really do your research about the market you’re buying into. When you’re buying in a city you’re familiar with, you likely have some firsthand experience with the suburbs you’re looking at. You probably have a fair idea about the kind of rental demand and type of tenants common to each suburb.
When you’re buying interstate or in an area with which you’re unfamiliar, you really need to put the time into researching rental demand, yields and price trends. You might even want to engage the services of a buyer’s agent to help you navigate the market. You’ll also probably want to find a good property manager to take care of finding tenants, collecting rent and fielding repair requests.
You’ll also want to talk to an accountant about the tax advantages of investing, and figure out how best to maximise your cash flow while minimising your tax liability. You’ve probably heard of negative gearing. This is a tax rule that allows you to deduct any loss you make on your investment property from your taxes. Because of the way it’s structured, it’s possible to generate positive cash flow from an investment property but still be negatively geared and enjoy tax benefits. A good accountant can talk you through this.
But suppose being a property investor doesn’t appeal to you. You just want a home to live in, and settle down into a community. Is there still a way to get a home loan with no deposit?
Fortunately, there is.
Guarantor home loans
Back before the global financial crisis, it was possible to get a home loan with no deposit at all. Some lenders would even lend more than the value of a property, so you could use the excess to furnish your new home or take care of other costs associated with your property purchase.
The financial crisis put a pretty definitive stop to that practice.
But there is still a way for people to get a home loan without a deposit. However, it does require a close family member and a lot of trust.
Guarantor home loans are a type of no-deposit home loan where your parents or another immediate family member offers their property as security. This means that, instead of paying a deposit, your family member signs a contract stating they’ll be responsible for your home loan if you default on it. They use the equity in their property to secure the loan (equity is just the difference between the amount their house is worth and the amount they owe on it).
If you have a parent or close family member willing to be your guarantor, you can potentially avoid a deposit altogether. You can also avoid paying lenders mortgage insurance as the size of the deposit is determined by the equity your family member is putting up, not by any cash you have.
Without a guarantor
In this example, the borrower takes out a loan with a 5% deposit and must pay LMI fees on a 95% LVR home loan.
With a guarantor
In this example the borrower has a family guarantor who puts a portion of their property up as security. The borrower then only needs to borrow 80% from the bank.
Obviously, there are some very serious factors to consider here. If your parents agree to be your guarantor and you default on your home loan, they’ll be on the hook for it. If they’ve put their own home up as security, that means they could lose their home if things go seriously wrong. It’s a very big decision and a serious commitment. Think long and hard before asking your parents to be your guarantor, and they should think long and hard before agreeing. They may even want to talk to a solicitor.
The good news is that your guarantor will be released from their contract when you’ve made enough repayments to cover the amount they’ve guaranteed. This is why you might want to opt for a home loan that allows you to make unlimited additional repayments so you can release your guarantor as quickly as possible.
Having a guarantor is really the only true no-deposit home loan option, and some lenders actually require at least some contribution from you, even if you do have a guarantor. But if saving a deposit just isn’t feasible, a home loan guarantor might be a solution.
So after working your way through finder.com.au’s Definitive Home Loan Deposit Guide, you’ve seen what to save, how to save, what to do with it and even how to get into the housing market if a home loan deposit is in the too-hard basket.
The only thing left to do is to start putting that deposit together and work your way toward your home loan goals. Happy saving.
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