By Graeme Salt
Amassing a down payment remains a huge hurdle for aspiring buyers, despite easing house prices.
A house deposit generally needs to be 20 per cent of the value of the property if buyers want to avoid paying what’s called lenders mortgage insurance (LMI). LMI protects lenders from losing money if a borrower defaults and can cost tens of thousands of dollars.
In Australia’s most expensive property market, Sydney, the median dwelling value is $1.27 million, a 20 per cent deposit is $253,122.
For younger buyers, getting a full 20 per cent deposit together is becoming near impossible, particularly in Sydney and Melbourne.
Even where parts of those markets have softened, the deposit required is still significant. Rent is rising, other living costs are going up which means it takes time to save.
There are two key challenges to home ownership:
- affordability, which is the ability to prove you can make the loan repayments
- accessibility, which is whether you have enough cash up-front to access home finance.
Many would-be buyers meet the income requirements set out by a bank to pay off a mortgage, but do not have enough saved for a deposit.
Here, we look at the options for you.
Lean on government incentives
There are two main nationwide initiatives from the Albanese government that seek to tackle the deposit hurdle.
The first allows buyers to come to market with a deposit as small as five per cent of a property’s value, and waives LMI, too. There are unlimited spots available, with no limit on how much you can be earning to use the scheme.
The second is the Help to Buy Scheme, which first became available in December. There are two banks which participate in this scheme. It’s shared equity; where the government covers up to 30 per cent of the purchase price of existing homes, and up to 40 per cent for new builds.
While you only need to contribute a minimum 2 per cent deposit, you’re sharing ownership – and future capital growth – with the government, which also expects its equity share to be paid back, either through repayments or after the property is sold. You can avoid LMI with this scheme, too.
Low deposit home loans
Most lenders offer some variation of a low-deposit home loan already, with the key trade-off being that the buyer is still subject to LMI.
And one lender specialises in first-home purchases – lending as much as 98 per cent of the purchase price.
Visit the Bank of Mum and Dad
More than 67,000 Australians may have received some form of help from the Bank of Mum and Dad to buy a home in the past 12 months.
The Bank of Mum and Dad has become Australia’s fifth-largest mortgage lender, with parents contributing an estimated $35 billion annually.
By using it, you can manage the accessibility hurdle – Mum and Dad’s funds provide you with a significant deposit.
But it’s important that the whole family understand what these funds are:
- Are they a loan or a gift
- How are the funds to be repaid
- What are the implications for the rest of the family estate
Go Halves with a Mate
Cobbling together the funds for a a deposit is a major hurdle – and banks understand that, for first-time buyers, it’s a major challenge.
Some banks have special loans where you buy with a friend (or sibling). But you have separate loans – you don’t have to see how the other one is managing their finances.
And these loans don’t have to be 50/50 if you prefer. If you have different deposit amounts of incomes, you can choose who owns (and owes) how much.
This way, the biggest issue is putting up with your housemate!
Australian property is some of the most expensive in the world. But owning your own place is still part of the Great Australian Dream.
If you want to know more about how you can buy your own place, feel free to get in touch.
Graeme Salt is an award-winning mortgage broker. For a no-obligations consultation on your home loan needs., please contact him on 02 9922 5055.
