Deposits, deposits, deposits
9 December 2021
Heading into the home buying journey with my now husband, we were both under the impression we needed over $100,000 saved before a bank would even let us through the door, let alone lend us a lot more to buy a home. We felt inundated by social media posts of friends uploading their smiling photos in front of their first home with that ‘SOLD’ sign and each time we were left perplexed. How did they save so quickly? They can’t be earning any more than we are, are they? Did they have a handout? Maybe a lotto win?
The mind game was never ending. What were we missing? Why was the reality of owning our own home so out of reach for us?
That was when I said, enough was enough and we booked our first meeting with our local mortgage broker. I can still remember how quickly my perspective changed after having that first meeting.
So, just how much of a deposit do you need these days?
What I learnt from that first meeting is that there are multiple ways to buy a home without the standard 20% deposit. So, if you’re tossing and turning every night thinking you have to save a couple hundred thousand to buy a home and that you might never get to eat your avo on toast again – tonight you’ll rest easy because that’s not necessarily the case.
You see, there are lenders who will allow you to borrow up to 95% of the property value, meaning you might only need a deposit of 5%. However, there is a catch. A little thing, called Lenders Mortgage Insurance or LMI – something which pops up a lot but again, is one of those things that many of us new to home buying might not know much about.
We will discuss LMI in detail in the next article of this series.
For now, LMI is how the lender or bank protects themselves when a loan amount is in the higher range i.e. when you’ve borrowed 95%. You see, if your Loan to Value ratio or LVR is on the high side, you could be considered a higher risk to the lender. To mitigate the risk, the lender will add LMI to your loan.
LMI is calculated as a percentage of the loan amount and will vary depending on your LVR. Your mortgage broker will be able to calculate this for you and you can make an informed decision as to whether or not this is the road you wish to take. For some homebuyers it may be the only way to get into the market. Everyone’s circumstance is different so you have to do what’s best for you.
A guarantor loan
Having a guarantor on your home loan is an option for those without the 20% deposit saved and is also a way to avoid LMI. When you have someone go guarantor on your loan, they’re putting their own home equity down as a security for your loan. The guarantor won’t need to pay anything, however if you default and can no longer make your repayments, the lender will turn to the guarantor to make the repayments.
A helpful resource to find out more is the money smart website https://moneysmart.gov.au/loans/going-guarantor-on-a-loan
The First Home Loan Deposit Scheme
The Australian government initiative known as
The First Home Loan Deposit Scheme
(FHLDS) was introduced to support eligible first home buyers (FHB) purchase their first home sooner. There are usually 10,000 ‘places’ each financial year which are given to both small and large lenders who are able to offer this as an option to eligible FHB’s.
In short, this scheme allows FHB’s to purchase a home with less than a 20% deposit and eradicates the need for LMI – because essentially, the government will be going guarantor for you. Under this scheme, eligible FHB’s can purchase a home with as little as a 5% deposit.
As you pay off your mortgage, you will eventually be released from the scheme, so it’s not permanent.
Your mortgage broker will have contacts and relationships with lenders, where they will be able to find out which lenders may still have places available under this scheme. They will also be able to help you with releasing from the scheme when you’re eligible.
Talk to your mortgage broker about your personal circumstances and what options may be best suited to you.
About ALI Group
ALI Group is a leading provider of financial protection to Australian home and property buyers.
Since 2003 we've protected more than 221,000 Australians with over $59 billion in cover.
Our mission is to protect Australian home and property buyers from financial hardship. We have a close affiliation with the mortgage broking industry – and almost 3,000 brokers nationwide are authorised to offer our products.
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