Buying Your First Home with 5% Deposit

Saving for a deposit on a first home can be tough if you're still renting a place to live. But you should not abandon the idea of owning a first home. 

When your deposit isn't huge, it's still possible to purchase your own place. In this article, you will learn about buying your first home with a 5% deposit and a few other important things. So, keep reading.

The Myth of the 20% Deposit

In general, lenders require that you put down at least 20% of the purchase price of your home. But you may be able to make your down payment much lower. Some lenders let you borrow up to 95% of the value of a property, so with just a 5% deposit, you can get the property.

First Home Buyers may qualify for grants which may help them to make a better budget for their first home. You should check out if you're eligible for any financial assistance schemes or not. 

Aside from this, you may use the property of your close relatives as an additional security for your home loan. In that case your parents, for example, can be guarantors for your loan. They won’t have to help you with regular payments for the loan and you will still need to demonstrate that you can meet the commitments by yourself, however if you default on your repayments, the guarantors will also be liable to repay the debt. 

What Is LVR, LMI & How It Works?

The loan-to-value ratio (LVR) indicates how much you owe compared to the value of your home. When your LVR is higher, you owe much more than what you deposited. Therefore, a high loan to value ratio makes you a greater risk to the lender.

Lenders Mortgage Insurance (LMI) is likely to be required if your LVR is above 80%. Borrowers with low deposits do not subject the lender to risky loans. If you want to save money on LMI, you must put down more than 20% of the purchase price.

You might be interested how much is LMI premium and how to calculate it. So you can use LMI calculator on our website in order to get rough estimate end better idea about LMI premium.

In some situations, even with a low deposit and LMI, a low deposit may make sense. Taking this step will cause you to encounter additional expenses, so you should carefully consider your financial situation before moving forward.

Through LMI, you can purchase a home without saving 20 percent of the purchase price. In addition, a larger deposit could increase your chances of getting a lower interest rate. A great number of first-time homebuyers could not afford to buy a house without LMI.

The question of whether you should rent and save for your 20% deposit or purchase your property earlier with a smaller deposit is an important one. Even if people are renting currently and cannot pay 20%, they should keep saving and paying their rent. 

Perhaps it would be better for them to pay the LMI premium and own the property. The reason behind it is that the property market value increases over time, so saving enough to avoid paying LMI could take a long time.

You might be interested how to calculate this difference and potential savings. We have prepared a unique tool which is available for you on our website and it might help you to make a decision. Please contact us  and obtain more information about all options available for you today.

What About Credit Score and Credit Records?

The lender and the LMI insurer will check more preciously your credit records in case of a small deposit of 5-10%. An insurer may respond with a "Please explain" if there is any potential problems or uncertainties in the report (such as default payments, numerous number of enquiries, etc.). 

To prove you are eligible, you might need to provide additional financial records. If you need help organizing your loan application paperwork or check your credit report, you can book a free consultation with us, and we will guide you more about it.

Other Costs

An initial deposit is only a part of the cost of buying your first home. Other costs such as ongoing costs and upfront are also involved while purchasing a property in Australia. 

Other than this, a few more examples of these are stamp duty, conveyancing fees and council rates. You need to bear in mind about all government fees involved into this transaction and you can use the Stamp duty calculator on our website to get the rough estimate of additional expenses.

Summary

Sometimes it seems to be almost impossible to purchase a new house if you don’t have substantial amount of savings but it is not always the case. There are multiple options available to finance the house purchase today with a small deposit and you might be potentially eligible for FHB Grant that can make it even easier to buy your first home in Australia. Please contact us and book a free consultation in order to check all options available for you to purchase a home today.