High property prices and increasing interest rates have made it difficult for Australians to join the property market, with 89% of first home buyers finding it more challenging to save for a deposit, according to Helia’s October 2023 Home Buyer Sentiment report.
Without a significant pot of savings, you might think there is no way you can achieve homeownership. However, there are several options available that don’t require saving 20% of the property’s value for a deposit.
Paying lender’s mortgage insurance (LMI)
LMI is an insurance that the lender takes out to protect itself in case you are not able to pay off the home loan. The lender passes on the cost of the insurance to the borrower. Lenders generally insist you pay LMI when your deposit is less than 20% of the property’s value.
LMI can be paid upfront or added to your home loan amount. The downside of adding the LMI to your mortgage is that you will have to pay interest on it, adding to the overall cost.
LMI can seem like an added cost when buying a property, but it isn’t necessarily something to be avoided. That’s because it lets you enter the property market earlier than you might otherwise be able to. This can be particularly helpful in a rising market where saving a 20% deposit might take too long, and prices could increase beyond your savings capacity.
Accessing the home guarantee scheme (HGS)
The federal government’s HGS helps first home buyers enter the property market sooner by providing three types of guarantees:
- First home guarantee: For eligible buyers, the government guarantees part of your mortgage. This allows you to buy a home with a deposit of as little as 5% without needing to pay LMI.
- Regional first home buyer guarantee: The government guarantees part of your mortgage for purchasing regional property. This enables those eligible to buy a home with a deposit of as little as 5% without needing to pay LMI.
- Family home guarantee: The government guarantees part of the mortgage of single parents or guardians with dependents buying their first home. This allows eligible buyers to purchase a home with a deposit of as little as 2% without needing LMI.
Using a family guarantee
A family member, known as a guarantor, can use the equity in their own home as security for your loan. If you only have a small portion of the deposit saved, the guarantor will use equity in their home to cover the remainder. This means you do not have to pay LMI as the 20% deposit requirement has been met.
Your guarantor isn’t required to make any additional payments or provide any money upfront. However, if you subsequently default on your loan, your guarantor will become liable. This means it’s important everyone involved understands the risks before committing to a family guarantee loan.
Buying property with a friend
Pooling savings with a friend means you may be able to cover the full value of the deposit and avoid paying LMI. Buying with a friend also means ongoing costs like council rates are more affordable.
However, there are some risks to co-buying, so before you choose this option, it is recommended you have a clear, written agreement explaining your ownership structure and who owes what.
Asking a professional
Just Imagine Finance can help first home buyers access finance. A professional mortgage broker knows the options available to first home buyers who are struggling to save up a large deposit. As a first home buyer, a mortgage broker will be able to tailor options specifically to you and your financial circumstances. This means you won’t have to struggle to find the alternative that best suits you.
Interested in buying your first home? Just Imagine Finance can help you explore alternative options if you are worried about your deposit. To get started, contact us on email@example.com or 0414 673 359.