You want to buy a house. Great! And you have seen the property of your dreams. Awesome! And you are about to sign a contract. Let’s pop the champagne!
You have saved a deposit, right? And you have had it for at least three months, haven’t you?
We often see potential first home buyers go full steam ahead with a property purchase, not fully understanding the contribution they will need to provide.
We love the enthusiasm, but frequently we are handing out reality checks. The ideal deposit amount is 20% of the property value, as this will help you avoid Lender’s Mortgage Insurance (LMI) – a one off cost applied to high risk, low equity loans.
But if coming up with this kind of money no more than a pipedream, there are other options.
Some banks will lend up to 95% of the property value but these applications will be subject to LMI, the cost often running into the thousands depending on the loan amount and the loan to value ratio.
But beware, you might be willing to wear the LMI cost but quite often interest rates and bank policies differ when you are unable to meet the 20% deposit requirement. This is crucial to understand.
These differences in rates and policies also differ between lenders.
There is also a viable option through one current lender who will accept as little as 1% deposit.
This needs to be reflected as “genuine savings”, that is, held in an account in your name for at least three months.
However, this lender is restrictive as to who can qualify for the 1% loan product and the loan is not priced as competitively as other institutions.
No deposit? No genuine savings? There is a Plan B.
Parental guarantees are still frequently used to assist first home buyers enter the property market.
This involves a parent or immediate family member offering their own property as security usually up to 20% of the purchase price.
While there are many factors that come into play to make this alternative viable, it does ease the need for a deposit and genuine savings.
In the property buying transaction, it’s not just the deposit contribution which is a mitigating factor, but your serviceability or capacity to borrow.
You may have the 5% or even 20% to put down on the home of your dreams, but it’s all irrelevant unless your income supports the loan amount you need to complete the purchase.
Before you even start looking at properties, it’s best to speak to a mortgage broker. They can assess your situation and let you know what you can borrow with your current deposit, and advise what you should be aiming to save.
You can then figure out what price range you can look at.
There are options at any level of deposit to become a first home owner, it’s just a matter of figuring out what works for you!
Blackburne Mortgage Broking have assisted hundreds of first home buyers in Perth, and are ready to help! To book an appointment, call us on +61 8 9429 5794 and ask to speak to Paul Prindiville, Mortgage Broking Team Leader, or complete the enquiry form below.