For aspiring home buyers in Australia, the dream of owning their own property is becoming increasingly out of reach. With prices continuing to rise, it’s becoming harder and harder to save up a big enough deposit. You could buy a home with a lower deposit, but there’s a catch – Lenders Mortgage Insurance. Hey everyone, Michael here from Lendstreet, helping you make informed decisions about your loan and finance needs. Probably one of the biggest hurdles you’ll have to jump when
What if you have less than 20% deposit?
it comes to entering the property market is saving for a home loan deposit. In most cases, lenders want you to save at least 20% of the house’s value and they’ll fund the other 80%. But if your eager to get into the market without having to wait to save 20%, some lenders will help out with a few options. For example, you can request to pay a 10% deposit. Some may even let you fund a home loan with as low as a 5% deposit. There is a risk for the lender though because they’re lending you more. So to balance that risk, they’ll usually ask you to pay Lenders Mortgage Insurance. Lenders Mortgage Insurance or LMI is a one-time
Lenders Mortgage Insurance (LMI)
insurance premium that a lender will ask you to pay when the loans-to-value ratio is bigger or higher than 80%. You’re paying for it, but it protects the lender’s interest in the event that you default on your home loan repayments. The cost of LMI will vary depending on the size of your loan, the size of your deposit, the purpose of the property so, whether it’s to live in or rent out, and the lender’s insurer but it is usually a sizable amount. You have the option to pay it upfront or capitalise it on your loan, which is what most borrowers end up doing but then of course you’re going to be paying interest on it and that makes it even more expensive.
So a question we get asked often is whether there’s a way to still get a home loan with a lower deposit and avoid LMI. And the good news is yes, there is. You just have to know what those options are and how you can take advantage of them and that’s where we come in with this video. So make sure to stick around and see if one of the options is viable for your circumstances. Let’s jump straight to the first one, government schemes.
There are a few government schemes aimed at helping home buyers enter the property market. One of these is the first home guarantee which is run by the federal government and helps first-time home buyers buy a property with a deposit as low as 5% and avoid LMI charges. How it works is that the National Housing Finance and Investment Corporation essentially guarantees the lender up to 15% of the purchase price of your home if you default on your repayments. That way, the lender’s risk is reduced and there is no longer a need for LMI.
Other government schemes like the First Home Owners Grant would help boost your deposit over the line which could help you avoid LMI. But there’s a few eligibility criteria you need to meet and there’s also limited spots each year so you need to make sure you get your application in sooner rather than later. Another popular alternative is to get a guarantor to secure your loan. This works by asking a
close relative like mum or dad to use the equity in their own property to help you secure your home. In some instances, having a guarantor on your loan may even mean that you won’t need a deposit at all and if the lender has security for the loan, you’ll be able to avoid LMI too. But there’s always downsides to these types of arrangements which you have to consider carefully. Depending on the type of guarantee, the guarantors may be unable to use the equity themselves or sell their property. Also, if you default on your loan, their property could be at risk. So we strongly suggest that potential guarantors get legal and financial advice of their own to ensure they understand all the risks involved.
And then, a third alternative is to get a financial gift. If you’re lucky enough to be gifted money, it is possible to put a financial gift towards your deposit to help you avoid paying LMI. It’s important that the money is declared as a gift and that there’s no need for you to pay it back. Also financial gifts are typically viewed as non-genuine savings by lenders so you’ll likely need to show you have genuine savings of your own to get your deposit over the line without paying LMI.
Professional Home Loans
Lastly, you should check your eligibility for a professional home loan. If you’re a doctor, dentist, accountant, or engineer, you could be eligible to waive LMI completely provided that you pay at least five to ten percent deposit. This is because lenders often provide special discounts and loan conditions for certain professionals as they typically are high income earners and have good employment tenures. In other words, they’re seen as high income earners and so having a low risk of defaulting on their home loan.
So those are the top four ways you could potentially get away with avoiding LMI even with a deposit that’s less than 20% of the home’s value. Of course, it also helps to shop around a little bit. Don’t just settle on the first lender that seems to be offering an attractive deal. Having a mortgage broker on board can help you with this aspect of finding the best home loan because we’ll take into account your financial situation and objectives and provide you with a range of blown options to choose.
We’ll also negotiate with the lenders on your behalf to get the best possible deal. So if you’re thinking of taking out a home loan without LMI, make sure you speak to one of our mortgage brokers first. Otherwise, that’s it for this video. If you’d like to know more about the ins and outs of securing a home loan, make sure you hit the SUBSCRIBE button and stay tuned for more videos.
See you next time!