Article by Mozo
With the average house price in Australia sitting at almost $660,000, as a first home buyer saving the recommended 20% deposit means you’d need to come up with a whopping $132,000.
Thankfully there are low deposit and zero deposit home loans available (if you have a family guarantor), which allow you to get into the property market sooner.
Let’s discuss the difference between the two:
Some home loan providers allow first home buyers to borrow up to 95% of the property value. This is called a low deposit loan because you have a deposit under the recommended 20%. Using the above average house price of $660,000, instead of saving a mega $132,000 for a 20% deposit you would only need $33,000 with a 5% deposit.
If you’re purchasing your first property as an investor, keep in mind you may not be eligible for a low deposit loan, as many lenders only offer 5% deposit loans to owner occupiers (i.e you’re going to live in the home).
It’s important to remember if you’re going to take out a low deposit home loan, you’ll be charged lenders mortgage insurance. LMI is scaled, so the more you borrow the higher you’ll pay for this insurance. A common misconception is that lenders mortgage insurance is a protection for the borrower in the case you get behind on your repayments, however LMI is actually an insurance that covers the lender if you forfeit on the loan.
The only way you can avoid the cost of lenders mortgage insurance is by asking your parent/s or a family member to be a guarantor for your home loan, which means they will put up a portion of their own home as security. First time investors may be happy to hear that if they can organise a parental guarantor then they may be able to take out a loan with a low deposit.
Now let’s run through zero deposit home loans, otherwise known as no deposit loans. Before the GFC banks and financial lenders allowed first home buyers to take out a home loan without a deposit but these days the only way you can apply for a zero deposit home loan and borrow 100% of the property price is if you have a parent or family member as guarantor.
The reason home loan providers allow you to borrow without a deposit if you have a guarantor is because they know if you are unable to meet your home loan repayments and you forfeit on the loan, any money they can’t recover through selling your property can be seized from the portion your guarantor put up of their home. That’s why guarantor loans can be risky.
An alternative option is for your parents to help you with the deposit. For example, you could aim to save 5% and your parents would give you the additional 15% to make up a 20% deposit.
While zero deposit home loans taken out with a guarantor allow you to get into the property market without a deposit, there are still plenty of other costs associated with purchasing a property. Here are some of the common ones:
Stamp duty: Charged by your state or territory, the cost of stamp duty can be significant and unlike lenders mortgage insurance that can be added to your home loan amount, stamp duty must be paid upfront. For instance our stamp duty calculator shows if you’re a first home buyer purchasing an existing property to live in worth $660,000, you will be charged over $25,500 in stamp duty.
Application fee: Many home loan providers charge an upfront fee for processing your mortgage application. This could be anywhere between $0-$700.
Ongoing fees: Each month on top of paying interest, you may also have to pay an ongoing service fee, which the provider charges for any administration costs associated with your home loan.
Break cost fee: Commonly charged on fixed rate loans a break cost fee could be charged if you try to switch loans within the fixed rate term.
The great thing about zero deposit loans taken out with a guarantor is you can still choose the type of home loan that suits you. Here are some things to think about:
Fixed vs variable: Do you want to lock in your interest rate, so your repayments stay the same? Then a fixed rate home loan could be your borrowing match. Alternatively, are flexible features like an offset account and extra repayments facility high on your priority list? Then a variable rate loan might be your best bet.
Interest only: The first few years of repaying your home loan could be financially tight, so a common choice for first home buyers is choosing to repay just the interest for the first few years. While this will lower your repayments significantly it’s important to remember that you will have to start paying down both the principal and the interest after the introductory interest only period comes to an end.
To see the other types of home loans available, read our indepth guide here.
1. Check your borrowing power
Make sure you check that you can comfortably service the loan, even if there is a rate rise, by punching in your numbers into our borrowing calculator. To give you a good example, if you wanted to borrow the average Australian home amount of $660,000, you (and or your partner) would need to be earning $100,000 per annum.
2. Show genuine savings
While getting a parent or family member to go guarantor may mean you can take out a home loan with a zero deposit, you will still need to show the lender you can service the loan on your own income. The provider will want to see proof of genuine savings by looking at around 3 months worth of bank and savings account statements. A smart way to ensure you’re always putting away money is by setting up a direct debit from your bank account to your savings account on payday.
3. Clear any debt
The home loan lender will also want to know if you have any current debt on a credit card, store card, personal loan or car loan. If you do have debt accruing it’s a wise idea to tackle this before applying for a loan.
4. Reduce your credit card limits
Any credit you can draw on will be taken into consideration when the lender is assessing you for the loan. So the lower your credit card limit the better.
5. Check your credit score
Did you know your credit report may have information on you reaching back to 5 years ago? That’s why it pays to check what your current credit score is online, to ensure you’re in the black when you apply for your first home.
6. Keep your life consistent
Changing jobs or purchasing an expensive item before applying for a home loan will be a red flag to the lender. So in the months prior show consistency by staying with the same job and avoiding any big purchases.
Here are Mozo we understand navigating the property maze can be confusing that’s why we have a dedicated first home buyers hub to run you through all the major must knows when it comes to purchasing your first home.
If you’re at the stage of comparing home loan deals, we also have a first home loans comparison section, which compares some of the top home loans available for first home buyers by the interest rate, fees and features.Home loan features guides