Finding a home loan if you have a small deposit
One of the biggest savings campaigns you’ll ever undertake is getting together your first ever house deposit. OK, to be fair, you might need to do it all over again if you’re planning a big enough upsize a few years down the line, but it’s safe to say that scraping together any down payment is no mean feat.
Running to stand still
It can also feel as if you’re running up a down escalator, too. You’re trying to build your deposit fund and all the while, property prices in your preferred area are rising by as much as seven per cent each year. The average house price in Brisbane at the moment is $524,000, in Sydney it’s $1.2 million and the national mean is $690,200.
Ideally, you should aim for a deposit that’s 20 per cent of the value of the properties you’re looking at. However, if you’re in Brisbane this could mean $105,000 or more and Sydney hopefuls will need $240,000 to get a foot in the door.
Sometimes, you just need to set down roots and this might mean that you get to around a 10 per cent deposit amount and decide to simply go for it. The right property comes along, you head to a mortgage calculator and realise that you can just about swing it. It can be worth the relatively high repayments in the first few years just to get on the ladder and stop paying rent.
Lower deposits mean higher repayments
They also mean you’ll almost certainly have to pay lenders mortgage insurance, or LMI. LMI is actually for the lender’s protection because you’re borrowing a higher proportion of the property’s value than many people and so you represent a higher risk of default to your mortgage provider.
LMI can often run into thousands of dollars or more, but it can be bundled into the balance of the home loan, where it’ll bump up your repayments for a good while, but it’s usually worth it just to secure a home.
For example, a couple wants to buy a house in Brisbane, which is on the market at the city’s median price of $524,000. So far, they have a deposit fund of $55,000, which is a shade above 10 per cent, or a loan–to–value ratio (LVR) of 89.5 per cent. This means they have a deposit of 10.5 per cent of the property value.
They’ll pay around $8,300 in LMI to make up for their small deposit. This actually works out well, because they don’t have to save up another $50,000 or so in order to buy a property and the LMI only adds a nominal amount to their monthly repayments.
Home loan rates are very low at the moment
The home loans market in Australia has some fairly low rates right now, with some products offering borrowers interest rates of under 2.5 per cent p.a. so this alone could help to make up for the LMI payments. It’s important to do the maths to see how much the LMI will add to the loan and also how much interest you’ll pay on it – don’t forget, if you bundle it into your loan balance, it’ll be subject to your loan rate.
However, not all lenders offer their best deals, or any deals at all, to borrowers with an LVR of more than 80 per cent. Having said that, there are some products for borrowers with low deposits and, in a relatively low cash rate environment, home–hopefuls can get on the property ladder without being hit too hard by high monthly repayments.
Here’s InfoChoice’s pick of some of the best low deposit home loans available on the market right now. The fixed rate deals are for three–year terms, so the rates on shorter or longer terms may vary slightly. The variable rate products are ongoing until the borrower decides to refinance their loan.
The Well Home Loans Well Balanced fixed mortgage offers borrowers with an LVR of up to 90 per cent an interest rate of 2.27 per cent p.a. (comparison rate 2.34 per cent p.a.). The application fee is $250, and there are legal fees of $385, but there are no ongoing fees. This product is available for loans of between $200,000 and $2,000,000.
This mortgage allows borrowers to make overpayments for free, which can be useful for homeowners looking to build up their equity faster. There’s also the option to redraw overpayments if necessary, as well as to split the loan between fixed and variable portions.
The IMB Bank fixed rate home loan offers borrowers with an LVR of up to 95 per cent an interest rate of 2.39 per cent p.a. (comparison rate 3.08 per cent p.a.) on loans between $10,000 and $5,000,000.
The application fee is $449 and there’s also an ongoing monthly fee of $6, but the mortgage allows for overpayments and redraws on those overpayments.
The Well Home Loans Well Balanced variable rate mortgage offers borrowers with an LVR of up to 90 per cent an interest rate of 2.52 per cent p.a. (comparison rate 2.55 per cent p.a.) on loans between $200,000 and $2,000,000.
The loan allows for overpayments and redraws and there’s an application fee of $250, but no ongoing fees. There’s also the option to make repayments weekly or fortnightly, as well as monthly, which can actually help to pay down the balance faster.
Compare over 1000 variable and fixed home loan product at Infochoice.