In Australia, saving up for deposit on a home can take months (if not years!), and many first time home buyers are finding it hard to enter the property market. With the minimum deposit for a home loan sitting at 20% of the property purchase price, it can be a struggle to save up while grappling with the rising costs of rent and living expenses.
If this sounds all too familiar, then you might want to look into a 5% deposit home loan.
These low deposit home loan schemes can be a good option for home buyers who are eager to get onto the property market. Read on as we walk you through what it is, how it works and what you need to know about 5% deposit home loans.
What is a 5% deposit home loan?
A 5% home loan is a type of low deposit home loan that certain lenders offer, and is helpful for first-time home buyers to get into the property market. By only requiring a deposit of 5%, the home buyer will then borrow the remaining 95% of the property cost.
This means that home buyers don’t have to spend so many years saving up for a full deposit and can buy their first home sooner.
The only catch? You will need to pay LMI (lenders mortgage insurance), which is an extra upfront cost you need to budget for.
The pros of low deposit home loans
Low deposit home loans offer significant benefits to home buyers and investors. By reducing the initial deposit figure, you will have a much more achievable savings plan target to reach.
For example, if you’re buying a home that costs $400,000, with a 5% deposit home loan you will need to save $20,000. With a standard home loan, you would need to save $80,000 for the same property.
This allows investors and home buyers the ability to enter the housing market sooner, and more time to start building equity and let the property increase in value.
Property is generally a long-term investment. Traditional thinking here tells us that the earlier you get onto the property ladder, the better.
The cons of low deposit home loans
While a 5% deposit home loan can offer plenty of benefits, there are also a few risks that come with this type of property loan structure.
Firstly, having a small deposit means that your lender will expect you to pay LMI. This is because a smaller deposit means that you’re borrowing a much higher amount from your lender, and in the case of 5% deposit home loans it’s as much as 95% of the total property cost.
For lenders, this can be risky and LMI protects them from a case where the borrower is unable to repay their loan. While, LMI is only a one-off cost, it can be expensive and should be considered in your overall budget for a low deposit home loan.
Using a lender’s mortgage calculator we can see that if you take out a 5% deposit home loan on a $500,000 property, you will be required to pay around $15,888 in LMI.
For properties around the $800,000 mark, a 5% deposit home loan would see you paying up to $34,900 in LMI.
On the flip side, claiming those LMI costs on your annual tax return can be a good way of reducing your tax on your investment property.
Be aware though that borrowing up to 95% of the property price also means that you are going to have a lot of debt to repay and might be paying more in interest rates over time. This could add significant pressure to your financial situation in the event of a sudden emergency.
Standard vs Low deposit home loan costs
Low deposit home loan
Standard deposit home loan
How much deposit do I need for a regular home loan?
Most lenders require a minimum deposit of 20% of the total property price to offer a home loan (without the need for paying LMI). However, low deposit home loans allow you to buy a property with a much smaller deposit.
With a low deposit home loan, you may only need to have between 5% and 10% of the total property price.
Can I purchase a property without a 20% deposit?
There are many ways for home buyers to purchase a property without the standard 20% deposit. These include:
- Low deposit home loans: Requiring as little as a 5% deposit, a low deposit home loan can help you purchase property faster. However, they are sometimes harder to get approved for and will also require you to pay extra fees, LMI.
- First home owners grant: This national scheme offers eligible first home buyers a one-off grant of around $10,000 to put towards a house deposit. This is only available to first-home buyers, so investors won’t be eligible.
- Guarantor loan: A guarantor is usually a parent or family member who offers their own property as security over your home loan. This is the only type of loan in Australia that doesn’t require any deposit at all.
Ultimately, many of these options aren’t the right fit for property investors and are more geared towards first-home buyers. That’s what makes a 95% home loan so attractive: it can help first-time investors secure their first investment property with small capital investment.
Before taking out any home loan, it’s worth sitting down with a mortgage broker and weighing up the costs and benefits of the type of loan against your own financial situation. With a professional opinion, you can figure out if a 5% deposit home loan (or other loan types) is the right move for you.
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