Home loans with no huge deposit: tips from mortgage experts

Getting a foot in the door of home ownership is hard as interest rates and prices rise, but a big 20 per cent deposit can be avoided.

Home buyers are not giving up on their property ownership dreams despite surging interest rates and high house prices.

New research by CoreData and lenders mortgage insurance company Helia has found four out of five buyers are unable to save a traditional 20 per cent deposit, and many are cutting back on dining out, takeaway coffees and even medical treatments, or taking second jobs.

However, 60 per cent of the survey of more than 3000 first home buyers, investors and other purchasers believe now is a good time to buy, and the latest government statistics show first homebuyer numbers rebounding from a five-year low as investors retreat from the housing market.

While scraping together a 20 per cent deposit may seem impossible with Australia’s median house price now $775,000 and the cost of living climbing, buyers have a growing range of strategies to get a foot in the door with little or no deposit.

RESEARCH YOUR OPTIONS

Homebuyer grants, government savings and deposit schemes, deposit bonds and the bank of mum and dad are among the options available.

Mortgage Choice says some lenders may offer loans of up to 97 per cent of a property’s value, but most want to see a history of genuine savings of at least 5 per cent.

Helia‘s Greg McAweeney says schemes and grants can be used together. Picture: Supplied

Helia’s chief commercial officer LMI, Greg McAweeney, says a traditional deposit does not include stamp duty and other purchasing costs. This can potentially add tens of thousand of dollars to buyers’ savings requirements.

McAweeney says people wanting to get into the market with a small deposit could:

• Research first homebuyer and government assistance programs.

• Use online tools to compare scenarios and examine deposit options.

• Shop around for different lenders.

• Speak with a professional mortgage broker or other home loan specialist.

• Consider lenders mortgage insurance.

“While LMI adds an extra cost to your home loan, it can help you achieve getting into home ownership sooner,” he says.

The federal government’s First Home Guarantee scheme helps people buy a home with as little as 5 per cent deposit without having to pay LMI. It guarantees up to 15 per cent of the purchase price but does come with caps and conditions, so research is required.

“Eligible borrowers can use the First Home Guarantee in conjunction with other government programs like the First Home Super Saver Scheme or state and territory first homeowner grants and stamp duty concessions,” McAweeney says.

A separate Family Home Guarantee scheme, for single parents with children, allows some Australians to buy a home with just a 2 per cent deposit.

Investors and people buying second properties such as holiday homes often buy without any cash deposit, because equity they have in existing properties can be used as the loan’s security.

BANK OF MUM AND DAD

Downsizer.com CEO Mark MacDuffie says first home buyers often rely on the bank of mum and dad helping out.

“Banks rarely lend to people who have not saved up enough cash for their home purchase,” he says.

“However, guarantor mortgages can be issued with a first homebuyer’s parents property as the security with lenders mortgage insurance. It comes down to affordability.”

MacDuffie says deposit bonds were “having a renaissance at the moment”, particularly for off-the-plan purchases. “With high interest rates, leaving their cash in the bank is a smart option,” he says.

Mitch Keough and Amelia Perry landed their first home after years of saving and being priced out of auctions, and chose to use lenders mortgage insurance “so we didn’t have to sacrifice on location”.

Mitch Keough and partner Amelia Perry with Charlotte, 15 months. Picture: iStock

“Home ownership has been fantastic for us,” Keough says.

“The ability to make it our own and slowly renovate areas has been a real positive aspect,” he says.

“Conversely, the increase in interest rates and inflation has meant we have had to keep a close eye on our costs and stick to our budget.”

WHAT CAN COUNT TOWARD A DEPOSIT

• Genuine savings that show you are capable of making regular repayments.

• Equity in other properties.

• Shares and other investments.

• Gifts of money from parents or others – this usually must be held in a bank account for at least three months to be considered genuine savings.

• Proof of consistently paid rent – lenders and mortgage brokers will look at individual circumstances.

Source: Mortgage Choice

Originally published as Home loans with no huge deposit: tips from mortgage experts