Home Loan Deposits
Most of us dream of living in our own home. But when you’re just starting out,
your level of income may not exactly allow you to save enough for a deposit to
buy a home. This is a common problem among first time home buyers. On top of
that, it is also difficult to save enough money to cover the fees. If you want
to avoid paying Lender's Mortgage Insurance (LMI), you will need to have a 20%
deposit. You can however get a home loan these days with pretty much no deposit
at all. While that might sound attractive, and it can help you get started, you
still need to be able to repay your home loan!
No deposit home loans mean more stringent standards in the mortgage lender’s
approval criteria, particularly in regard to your credit history. Since the
mortgage lender faces more risk with this type of loan, the interest rate will
be higher than the standard home mortgage. The difference can be about 0.7%,
more or less, compared to the rate for buyers who saved a deposit. That means
your monthly repayments will be higher.
When property values are on the uptrend, a no deposit home loan gives you an
edge; but in tight market conditions, you could face the risk of negative
equity, where you owe more on your mortgage than the market value of the
mortgaged property.
There are three main types of no deposit loans
Home loans that provide for up to 100% of the purchase price while you pay
associated costs from proven genuine savings.
If you are a first home buyer, home loans that provide finance for up to 100% of
the purchase price (or property value) while you pay associated costs from
grants and gifts - no genuine savings required.
Deposit Saver Schemes
In 2008, the Government introduced a deposit saver scheme to assist first home
buyers to save for a home loan deposit. You can contribute a maximum of $10,000
each year (indexed) to this scheme and the federal government will pay a
contribution on up to $5,000 (indexed) of individual deposit contributions made
each year. Interest that accrues in the accounts will be taxed at 15 per cent.
Withdrawals will be tax free where they are used to purchase a first home to
live in.
Lender's Mortgage Insurance (LMI)
If you have 20% or more deposit and all other factors are in line, mortgage
insurance is generally not charged. On fully verified, no deposit loans,
dependent on the lender and the risk, mortgage insurance can cost up to 3% of
the amount you are borrowing. Up to 95% loans (or 5% deposit), the amount would
typically be up to 1.2% - 1.5% of the loan amount. As you get closer to 80% home
loans (or 20% deposit), the cost usually discounts substantially. These include
loans which cover 100% of the property price and loans which cover both the
property price and any associated costs.
No Deposit Low Deposit Loans and Fees
Even though banks and lenders advertise loans for "no-deposit" or "no deposit"
home loans, you will still have to contribute some of your own funds to cover
additional costs involved in the purchase (e.g. solicitor's fees, stamp duty).
More Information
If you have a savings goal or home in sight, it pays to talk to a mortgage
broker who understands both the first home saver scheme and can help you
understand what your home loan options are as well as set up your savings scheme
with the right bank for you.
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