Lenders are generally looking for borrowers with a 20% deposit to put towards a property purchase, plus you will also need money for stamp duty – which is around 4 to 5% of the properties value. With high property prices, saving up this deposit can be a difficult task. Furthermore, as property prices rise saving this deposit becomes a moving target. It is possible to get a mortgage with a lower deposit – but there may be high costs involved.
So what’s the key to getting a home loan without a 20% deposit?
Lenders Mortgage Insurance (LMI)
If you have some savings, but not the full 20% plus stamp duty the main way to buy a property is by paying for Lenders Mortgage Insurance (LMI). It is very important to understand that LMI protects the lender not the borrower. If you are unable make your mortgage repayments and the property has to be sold, LMI will pay the bank any shortfall from the sale proceeds.
Lets go through an example
If you find a property for $1 million, and you have cash savings in the bank of $150,000, you don’t quite meet the 80% loan to value ratio.
On top of this, when you include paying the stamp duty, which would be around $40,490 for a property of this value in NSW – calculate your stamp duty here.
It leaves you with an even smaller deposit of $109,510.
The LMI will be $21,817 – you can estimate LMI here. This LMI can be paid upfront, but more commonly is added to the loan amount. Therefore, taking everything into consideration –
The loan amount will be $1,000,000 less $109,510 plus $21,187, leaving us with a total of $911,677
Therefore the LVR is at 91.1%, keep in mind that mortgages with LVR’s higher than 80% will sometimes attract higher rates than loans with lower deposits.
What if you have very little savings?
LMI assumes that you have 5% or more in savings. But what if you have even less?
Here are a few different ways you can secure a 100% home loan
1. 105% guarantor loan
One way of getting into the property market is to ask your parents or another family member if they can co-sign your loan as a home loan guarantor. In a parental guarantor home loan, borrowers may be able to borrow up to 105% of the property value. The extra 5% above the properties value could be used to pay stamp duty or other settlement costs.
In this type of loan you don’t need any savings and is often considered the best way to buy a property without a deposit.
2. A gift
If you receive a monetary gift or windfall, you may use that to put towards a house deposit. 60% of first home buyers receive help from their parents. Whilst most traditional lenders require your deposit to be made of genuine savings as it shows behavior that you will be able to repay the loan, some lenders will accept a deposit that comes from a gift.
If you have received a gift and want to know how you can use it as part of your deposit, apply with us here to chat to a loan advisor.
3. Personal loan as a deposit
It is technically possible to fund your home loan deposit with a personal loan but it can be difficult and is very uncommon. Some lenders will offer home loans to those who get personal loans to cover the deposit, but only if the borrower can prove they have a high enough income to repay both a personal loan and a mortgage and that they have a clean credit history.
You can also help your application in these types of situations by staying in the same job during the time you’re applying for a home loan.
4. Equity in another property
Equity is the difference between how much you owe on your property and how much it’s worth. If you already have a home loan on a different property, you can release the equity on that property via a refinance and use the funds as a deposit towards buying another property.
The majority of lenders will allow borrowers to use up to 80% of the equity they hold in one property as a deposit to buy another property.
This isn’t a home loan with no deposit, but it is one way in which you can avoid using personal savings. If you have enough money in superannuation you can set up a self-managed super fund (SMSF) to buy a property.
You can only use an SMSF to buy an investment property – i.e. you cannot live in the property and there are a lot of other rules to be aware of.
Interest rates and fees on high LVR loans
Taking a loan with an LVR higher than 80% will increase the interest rate on your loan in addition to the LMI you will have to pay. You should consider how important it is to you to purchase a property now rather than saving up for a higher deposit, and whether these additional costs in the form of LMI and increased interest rates are suitable for you.
If you don’t have enough savings for a 20% deposit and want to discuss with a specialist about how you can secure a home loan, get in touch with us here. FundingPro are able to assist with securing you a lower interest rate when it comes to your home loan and further finance such as car loans.
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