- Posted 26 Oct
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The biggest barrier for first home buyers is saving for a substantial deposit. In the past, the standard deposit was 20 per cent, but as home prices continue to rise that number seems unattainable to many.
Are there other financing options you can use to purchase a first home? Do you have to settle for a cheaper property so that you can afford the deposit? In this article we look at home deposit requirements and possible workarounds.
What is the absolute minimum requirement?
Lenders will require at least a 5 per cent deposit for nearly all mortgages. But you’ll need to save double that, since legal fees and the stamp duty on the property will add up to around another 5 per cent.
This means, for example, that in order to purchase a $400,000 home you’ll need $20,000 for the deposit and another $20,000 to pay for purchase costs.
If you are unable to save this amount and have a family member willing to help, a guarantor loan can help you purchase your home faster. The way it works is that the guarantor uses the equity in her own home to serve as a loan guarantee for your mortgage. Most lenders require guarantors to be immediate family members.
A guarantor loan can cover the deposit and even the purchase costs, letting a first home buyer purchase a home immediately. You’ll also avoid the cost of lenders mortgage insurance (LMI). This insurance is required for any mortgage where the borrower owes more than 80 per cent of the loan, but having a guarantor eliminates this fee.
The guarantor is typically released from the agreement once you’ve built up equity in your home. Some lenders may charge a fee to release the guarantor.
Should you wait and keep saving?
A 20 per cent deposit is still seen as ideal, and lenders agree that a larger deposit is always better. If you put down less than that amount and don’t have a family guarantor, you’ll end up paying thousands of dollars over the years for LMI. However, this cost can be added to the loan so you don’t have to pay it all up front.
The argument against waiting of course is that saving for a deposit takes time. In the years you are saving, you’ll be stuck paying rent and probably watching housing prices continue to climb. Proponents of this argument see LMI costs as acceptable and advocate that you stop paying rent as soon as you can and start building equity in your own home.
The real answer is it depends on each individual’s situation. If you are able to save quickly it may be worth waiting 6 months or so. If you need a guarantor loan or plan to put the minimum down and pay LMI, that may be the best approach depending on your income and family needs.
If you are a first home buyer searching for a mortgage at a low rate, Australian Credit and Finance can help. Contact us today to begin the search for your dream home.