Saving up for a deposit on your first home can be a real challenge, particularly after the significant jump in housing prices in recent years. Having enough funds for a 20% deposit + stamp duty and only needing to borrow an 80% Loan to Value Ratio (LVR) is preferable, however there may be a range of approaches that enable you to buy a home sooner than you thought was possible with a smaller deposit.
So how can this be done if a gift or loan from the Bank of Mum & Dad isn’t an option?
Lenders Mortgage Insurance (LMI) can enable you to potentially borrow up to a 95% LVR. It’s normally paid upfront or added to the loan, however there may be options to pay much smaller amounts on a monthly basis, which can give you an opportunity to pay the loan down quickly to an 80% LVR and then cease this cost.
LMI waivers with some banks allow you to borrow up to an 85% LVR (or even 90%) with no LMI. An additional few also offer this for professionals such as accountants and solicitors up to a 90% LVR, along with doctors, dentists and vets who can access waivers at even higher LVR’s.
A Family Guarantee loan involves using your family member’s property (or term deposit) as additional security to reduce the bank’s risk instead of requiring a full deposit. Essentially the bank secures 80% of the loan against your purchased property and then secures the remaining 20% + stamp duty (or a lower figure depending on how much cash you contribute) using the family member’s property and personal guarantee. The guarantee is limited to only this minor portion of the debt and the borrower still needs to have capacity to make all repayments. The risks are important to understand but these are generally well mitigated - the guarantor usually needs to be in a solid financial position such that they would be unlikely to need to sell their property should the limited guarantee ever be called upon. The guarantee can then be removed once the overall debt reduces to an 80% LVR against your home after paying down the loan &/or an uplift in valuation.
Co-ownership with a family member or friend can be a way to combine deposits and incomes to buy a home or investment property. As each person’s circumstances and plans may change over time, consideration needs to be given to the potential downsides and limitations of this approach, and having an agreement in place that addresses how you deal with the property in the long term (including a potential exit strategy) is important.
There are also many government assistance schemes such as the First Home Guarantee. This only requires a deposit of 5% + stamp duty, as the government takes on the risk of a higher borrowing ratio instead of an LMI insurer. The scheme has several eligibility requirements, purchase price thresholds and limited numbers each year. The First Home Super Saver Scheme can allow you to make voluntary contributions (up to $50,000 for individuals or $100,000 for couples) to your super fund and later withdraw this to add to your deposit, with the potential benefit of paying much less tax than if you had saved this deposit amount through a normal bank account. There are also stamp duty exemptions and grants for first home buyers, these can also be useful depending on your circumstances but come with their own list of conditions.
Weighing up which approaches are available, cost effective and most suitable for you can be complex, so if you’d like to explore your options please feel free to get in touch with us.
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