Low Deposit Home Loans: Benefits & Risks
Are you looking to buy your first home, but finding saving up the deposit to be quite challenging? Well you are not alone.
It can be particularly challenging in Sydney, Melbourne and Brisbane - even regional areas have seen significant increases in property prices… so it just makes obtaining the crucial deposit even more hard.
That's why low deposit home loans are an options (and also quite appealing) to first homebuyers seeking a way to get their deposit and buy their home
Understanding Low Deposit Home Loans
Let's start by getting an understanding of what a low deposit home loan is. So a low deposit home loan is a essentially a home loan product designed to assist homebuyers' with affordability and accessibility.
In Australia, these loans typically require a deposit ranging from 5% to 10% of the property's value. Given this is lower than the 20% usually required, this makes the low deposit home loans attractive to first-time buyers who might have limited savings, or be struggling get a 20% deposit. The low deposit home loan provides an opportunity to enter the property market -quicker- by reducing the upfront financial commitment.
It's probably worth mentioning that low deposit and small deposit are the same. Some brokers and lenders will just use one or the other.
Also, due to the reduced deposit requirement, low deposit home loans provide an expedited home-buying process. However, you (the buyer) should be mindful that lower deposits may come with additional considerations, such as lender's mortgage insurance (LMI) and potentially higher interest rates. This is something your mortgage broker can talk with you about and assist with.
Who are low deposit home loans suited for?
There's probably a few ways to answer this question but the best way is by saying that low deposit home loans are quite advantageous for first-time buyers who might be starting the home loan journey. Why? Well it's quite simple…. the low deposit home loans only need a deposit -often- ranging from just 5% to 10% of the property's value.
This means the reduced initial outlay/deposit allows younger couples and individuals who might not have substantial savings get into the market much sooner than if they had to continue to save (and save, and save and save) for a 20% deposit.
If you are a first home buyer, chances are you are either renting or living with parents (which is absolutely fine - we've all been there). But the point is by tapping into a low deposit home loan and budgeting the transition from renting (or whatever your scenario might be) to owning becomes a lot quicker - and equates to quite an attractive option. It's not for everyone, and not everyone qualifies. But it's still an option worth consideration for some.
First-time buyers should consider also consider various government schemes, such as the First Home Owner Grant (FHOG), to further assist on the pathway to home ownership. You'll eventually need to speak with a mortgage broker and they are great. They will be able to provide you with incredibly helpful insights and see if it's an option for you. Mortgage brokers are there to assist you the during the entire process and if a low deposit home loan is not for you, they will be able to point you in the right direction or provide other options. They (mortgage brokers) really are good and worth speaking to when the time is right for you.
Advantages of Low Deposit Home Loans
Ok… moving on to the advantages on a low deposit home loans. We have touched on a few already them already but let's lay it out so it's nice and clear.Advantage number 1 - Lower upfront cost: Low deposit home loans reduce the upfront deposit required which means you don't have to keep saving. This is probably the most compelling advantage and works hand in glove with advantage number two which is…
Advantage number 2 - Faster entry: You can get into the property market a lot quicker. This is actually one of the big advantages as people really dislike the waiting period of saving up a deposit… especially as you are saving only to see property prices around you going up
Advantage 3 - Opportunity cost: Allows you to invest your money elsewhere -or- save for something else instead of just the deposit.
Advantage 4- Government assistance: Combined with grants and schemes a low deposit home loan can really help with the process of getting a home. There are various government grants like the First Home Owner Grant (FHOG), and, these low deposit home loans offer a genuine pathway to homeownership… but make sure you do the smart thing and explore all your options.
Government Grants
In the last paragraph just above we mentioned how the government grants can significantly help.
These grants can differ from state to state. For example, in some states across our nation, this grants have provided additional funding when purchasing a newly built home. This grants have become quite popular with first home buyers and have really helped to meet Australia's housing market conditions and supporting the growth of builders too.
The First Home Owner Grant (FHOG) aims to assist eligible first-time homebuyers in reducing the overall cost of purchasing a home, making it more feasible to enter the property market. Specifically, eligible buyers can receive a one-off payment, which can be instrumental in covering part of the deposit or other associated purchase costs. We encourage you to
Risks to consider with low deposit home loans
So we have gone through some of the upsides / benefits of a low deposit home loan - so now let's have a look at the points of consideration that might be risks and could impact your finances and long-term stability.
There are a few risks associated with a low deposit home loan. One significant risk (perhaps we should call it a challenge).
Secondly, is Lender's Mortgage Insurance (LMI), which is often required and can increase your upfront expenses. Let's have a quick look at those:
Higher Interest Rates
This can be significant challenge of a low deposit home loans and can somewhat combat not saving the additional funds for a 20% deposit. You see, low deposit home loans are seen as a higher risk to lenders (due to the smaller initial deposit), and consequently the the interest rates are usually higher.
Therefore, it's essential for you to understand that even a slight increase in interest rates can significantly affect your monthly repayments. Many Australians have seen this with the rate rises over the last 12+ months, so it's something to keep in mind and a point to discuss with your broker.
Another thing worth pointing out in relation to higher interest rates is that over the life of the loan, the higher interest rates could equate to a substantially larger total repayment amount.
It could be a good idea to compare offers from different lenders and discuss this with your mortgage broker so they can find you the most competitive interest rates available.
Lender's Mortgage Insurance
Next risk is the Lender’s Mortgage Insurance (LMI) component. LMI is typically required for home loans with a deposit under 20%. It basically offers a “safety net” to the banks/lenders against a default.
Therefore, home buyers such as yourself need to pay this insurance premium to secure the loan. The actual cost of LMI can vary widely depending on the loan size and the deposit amount.
Having an understanding the impact of LMI will have on your overall loan cost is important to know. It’s advisable to seek personalised advice from a experienced mortgage broker who can assist with this.
Eligibility and Application
Sounding good so far? Well unfortunately no everyone is eligible for a low deposit home loans. Due to the increased risk perceived by the banks and lenders, they can be quite strict as to who is eligible.
Firstly, you will most likely have to demonstrate a stable employment and income history. This helps shows the banks (based off historical data) you can service the loan.
Secondly, you'll need a satisfactory credit score. A higher credit score not only enhances your chances of approval but may also secure more favourable loan terms. Ultimately, a strong credit history demonstrates responsible borrowing and timely repayments. All of which bolsters your application, indicating you as a lower risk customer.
It's important to understand that even with a low deposit that you might have, striving for an excellent credit score is imperative. You should aim to review your credit reports and address any discrepancies. This will help ensures a smoother application process. Your credit score will be pivotal for both securing a low deposit home loan and getting a good deal.
Getting Pre-Approval
Wow, if you've read this far you must be serious about learning about and/or getting a low deposit home loan. We'll finish this up by saying that obtaining pre-approval for a low deposit home loan is a key step in the home-buying journey.
We have other -detailed- blogs on getting pre-approved and conditional approval which we encourage you to read if you want to learn more and have a deeper understanding. But as a quick overview, pre-approval, or conditional approval, involves a thorough review of your financial situation by the bank/lender. They will ultimately be assessing aspects such as your income, your expenses, and creditworthiness (as mentioned above).
For pre-approval of a low deposit home loan, it will generally involve you submitting different documents for verification - which may include your proof of income, identification, your latest bank statements, and any debts or liabilities you are carrying.
The journey of getting a low-deposit home loan might seem long but it can be fruitful. You really just need to do your homework and know if it's right for you. Speaking to a qualified mortgage broker can be helpful and they can guide you through the entire process.
Looking to see if a low deposit home loan is for you?
Use Joust Live Auction to see what competitive home loan deals you might be eligible for. It's free to use and you can quickly and easily see different rates from different providers - all based on your individual needs. Get started and give Joust Live Auction a try today.Frequently Asked Questions -
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*The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Joust recommends that you consider whether it is appropriate for your circumstances. Joust recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.
