First Home Buyer Deposit & Government Grants
There are certain costs when you buy a home. You will have to save a 5 percent deposit and it has to be genuine savings. For a lender to consider the savings as genuine and you must have had them for at least three months. This may vary between lenders. You will also need to factor in conveyancing fees which depends on the complexity of the transaction. You will also need a lawyer to review the contract and transfer the title. They will also assist with any other aspects associated with the property purchase. On top of that there is a fee to establish the mortgage. This varies between states. Then of course you need the deposit for the home. Most people will require a deposit of at least 20 percent but there are exceptions to this depending on your circumstances.
Minimum Deposit for a Home Loan
General deposit requirements in Australia are 20 per cent of the purchase price based on a 25 or 30 year term. A deposit is required to protect the lender and it means that you won’t need to borrow as much money. That reduces the amount of interest you will pay over the life of your loan. In some situations you can pay off the loan much faster. For example if you were buying a home for $600,000 you would need a deposit of $120,000 which is 20 percent of the value. On top of that though you will need to have the money available for the associated costs previously mentioned.
Why do lenders want borrowers to have a 20 percent deposit?
Lenders like borrowers to have a deposit because it reduces the risk to them. Those who have equity in their property are less likely to default or be in a situation where they need to stop making mortgage repayments. If you do however default on your home loan and the lender needs to resell the property the potential losses are minimised and you may end up with some funds left over, putting you in a better financial position. Ultimately saving for a deposit requires a lot of discipline and self control which makes you a more appealing prospect to lenders. Having a higher deposit may also reduce the interest rate on your home loan.
Lenders Mortgage Insurance (LMI)
While 20 percent is the most desired minimum deposit, some lenders will offer home loans with a 5 or 10 percent deposit. If your deposit is lower than 20 percent, you will be subject to Lenders Mortgage Insurance (LMI). This protects the lender in the event that you cannot make repayments. LMI is a one off cost at the time of buying a property. Its costs vary depending on the size of your deposit and the value of your property.
Guarantor for Home Loan
One option to avoid LMI is to have someone act as a guarantor for the loan. This basically means that someone agrees that if you cannot make the repayments they will make them for you. Typically it would be a home buyer’s parents acting as a guarantor on their home loan. However if that isn’t an option you do have other choices. If you are struggling to save a 20 percent deposit you do have options available to help you secure your first home.
One of the first options is to apply for a five percent home loan. As previously mentioned, if you do take out a five per cent home loan under the government’s First Home Guarantee scheme you won’t have to pay LMI.
What are the Pros and Cons of a low deposit?
Although it is in your best interests to have the highest deposit possible it isn’t always an option and there are pros and cons to a low deposit home loan.
Pros of Low Deposit
The first pro is that you get on the property ladder faster and don’t have to wait to save a high deposit. Getting on the property ladder faster means that if prices increase you will benefit from them and won’t have to worry about shifting goal posts. Instead you can enjoy the benefits of property prices increasing knowing that you are building the equity in your home.
That is another advantage. If the area you want to buy in is going through exponential growth then you will have a much more favourable LVR which could help you purchase an investment property quicker.
Cons of Low Deposit
There are of course drawbacks to taking out a low deposit home loan. If you find yourself in the position where you need to refinance then you will have low equity which will make it more difficult. You may not even be able to finance without minimum equity. If a lender is willing to let you refinance with low equity then you will probably be subject to LMI. This has to be paid in a lump sum and you would actually be better off putting that money into your mortgage. This will minimise your interest costs.
In addition to being required to pay LMI you could end up in negative equity which is where the mortgage value is higher than the cost of your home. That means that if your home was sold because you couldn’t meet the repayments you would end up with a debt and your financial position would be worse than before buying a home.
To help first home buyers get onto the property ladder the government introduced the First Home Guarantee in the 2022 Federal Budget. First Home Guarantee scheme is designed to help first home buyers who only have a five percent deposit. Under the First Home Guarantee you only need a five per cent deposit and the government will guarantee the other 15 per cent. You will not be liable for LMI under this scheme.
There are only 35,000 places available each year and you must meet the scheme’s criteria.
What is the criteria for the First Home Guarantee Scheme?
In addition to being able to meet the loan repayments you must:
- Be a first home buyer. That includes your partner if you are buying with a partner.
- Be an Australian citizen and at least 18 years old.
- Have a taxable income of no higher than $125,000 for singles and up to $200,000 for couples.
- Be an owner-occupier. You cannot apply for the scheme for an investment property.
Property that can be purchased under the scheme
Any type of property can be purchased under the scheme including:
- Newly built house, apartment or townhouse
- Off-the-plan apartment or townhouse
- House and land package.
- Land with a build contract.
There are price caps for each state. Please check government’s postcode search tool to find out the maximum you can borrow under the scheme.
First Home Owner Grant
You can read more on First Home Owner Grant in our other article.
For further information, please feel free to contact one of our friendly mortgage broker. Alternatively you can book an appointment online.