With the right lenders, it's still possible to buy a home with a small deposit
There are some lenders out there willing to accept applications from people who only have a small deposit saved. This is great news for first home buyers, but also for those on a tight budget who can't manage to save the huge deposit amounts some banks want to see.
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Why do you need a deposit?
Some banks insist on seeing that the deposit amount you have is genuinely saved. This means they want to see evidence of regular savings deposits going into a savings account towards building up your deposit over time. Usually, they'll ask to see your savings account statements to verify this.
Lenders want to ascertain what level of financial responsibility you have before you get into such a large, long-term debt. After all, if you can manage to pay your living expenses and still find the discipline to put money aside each week, they have more confidence that you'll do the same thing when it comes to making your mortgage repayments on time.
How much deposit do you need?
One of the biggest traps many home buyers fall into is saving a big enough deposit to purchase a home, but they completely forget to put aside enough money to cover the rest of the fees and charges associated with buying a home.
For example; your bank may ask that you have a 5% deposit. This means you'll need to put down at least 5% of the purchase price of the home, while they lend you the remaining 95% of the price.
So if you buy a house for $300,000 you will need a $15,000 deposit.
Borrowing 95% of the property value means that you will need to pay a lenders mortgage insurance fee. This is a fee that your bank's insurer charges them for lending you money above the usual safety threshold of 80% of the property price. You only need to pay this fee once. Unfortunately, it can often add thousands of dollars.
Some banks will let you capitalise your lenders mortgage insurance (LMI) fee on the top of your mortgage amount. So they'll lend you 95% of the purchase price of your new home, plus an additional 2% to cover the LMI fee.
There are also government fees and charges to account for. When you buy a home you will need to pay stamp duty. This is calculated differently for each state, so it's worth checking on a good stamp duty calculator how much you're likely to pay based on the amount you're paying for your home.
Don't forget to add in things like legal fees, conveyancing fees and transfer fees to your total. Find out the true cost of buying a property here.
First home buyers may be able to get a little assistance here with the First Home Owner Grants helping to cover those fees.
Can anyone get approved for a low deposit home loan?
While the banks might advertise that you can borrow up to 95% of the purchase price of your new home, it's important to realise that lending criteria still applies.
Good credit history
In order to get your loan approved at a high LVR like 95%, you will need to have a clean credit history. This means you should have no defaults showing on your credit report for missed payments on other bills.
Good employment history
You will also need to demonstrate that you have a stable employment history. This means showing that you've been in the same job for at least 6-12 months, or been working within the same industry in a similar role.
There are some job roles and industries where banks may consider approving your loan after only being in your job a short time. These can include nurses or paramedics, who are required to study for three years prior to gaining an employment contract. Those years of study, plus an ongoing contract can sometimes be strong enough to sway a credit assessor to approve your loan even if you've been employed less than 12 months.
You're unlikely to get your loan application approved if you're still on probation with a new employer, so it's best to wait until your probation has ended.
If you can show where your 5% savings amount came from, this will go in your favour. For example, showing your savings account statements with regular deposits going into it will be viewed favourably.
Good asset position
The credit assessor will view your existing assets and consider them in terms of whether you're doing well based on your age and income. For example, if you're a first home buyer and you have 5% savings and a car, this may be considered a positive asset position for your age and income.
If you're in a high income job and you're buying your second home, the bank will want to see that you have started to build up equity in your home and that you don't have all your credit cards maxed out. They want to see that you've been putting your income to good use wherever you can.
If you submit your home loan application and it shows that you have several credit cards, a car loan, and a personal loan all outstanding, it's likely your loan will be declined. If your outstanding debts add up to more than 7% of the purchase price of your house, you likely won't get approved.
Instead, one idea is to work on getting debts under control. Consider paying down credit card balances and close any unnecessary accounts. Consider also paying off any unsecured personal loans you have.
Remember, when the bank considers whether you'll be able to afford your new mortgage, they take your after-tax income amount and then they deduct all the payments you make on your current debts. Then they take away an extra amount to cover your living expenses and bills. The amount remaining is how much they think you have left to pay your mortgage.
So if you can reduce any unnecessary debts before you apply, you suddenly strengthen your application, as you've freed up your income from the burden of all those repayments.
Do no deposit loans still exist?
It was once possible to borrow the entire purchase price of a home with a no deposit home loan. These loans allowed you to buy a home without having to save a deposit at all. While, true no deposit home loans no longer exist, there are options for borrowers who are having trouble saving a deposit.
If you have generous parents and they're willing to extend you a gift to act as your deposit amount, you might be able to get away with a very small history of genuine savings.
If you're able to reduce your loan amount so you're only borrowing 90% of the purchase price, some banks won't ask you to prove that you have genuine savings. This means mum and dad need to come up with 10% of the purchase price and offer it to you as a gift. The bank will let you borrow the remaining 90% you need, but don't forget that you still need to pay stamp duty and other government fees and charges on top of that as well. Have you received a gift of money for a deposit?
Guarantee from parents
If your parents own their home and they are happy to act as guarantors on your mortgage, you should find you can borrow 100% of the purchase price of your new home without having any savings.
Essentially, the bank takes a guarantee from your parents that is secured by the equity they have in their own property.
Just be absolutely sure that you and your parents understand all the implications of guarantorship before you enter into this type of agreement.
If you already have equity in your family home, you may be able to use this to secure the purchase for your next property. Effectively, this lets you borrow 100% of the purchase price of your new property without having any savings.