How can I get into the property market without a 20% deposit?

How can I get into the property market without a 20% deposit?

The median price of a property when you combine all the Australian property markets – including both houses and units – is now $738,975. That means a 20% deposit will cost you nearly $150,000. No wonder it takes Australian first home buyers an average of 4.6 years to save for a deposit! Of course, it can be even longer in some markets. It takes twice as long to save for a deposit in Sydney as it does in Adelaide, Perth, Darwin or Hobart.

For many first home buyers, saving that amount of money will feel out of reach or will simply take too long. So, what’s the alternative if you don’t have a 20% deposit? 

There are a few options first home buyers can explore if saving a 20% deposit is out of reach.

Lenders Mortgage Insurance (LMI)

If you’re not in a position to raise the 20% deposit and your loan to value ratio (LVR) is more than 80%, you can pay lenders mortgage insurance (LMI). LVR is the amount of the loan divided by the property’s value. For example, if you’re buying a $600,000 house and you have a $480,000 loan, your LVR would be 80%. LMI protects the lender if you can’t make the loan repayments. It’s a one-off fee paid at settlement or added to the loan.

LMI gets a bad wrap with home buyers and investors who see it as an expense that should be avoided at all costs. However, it can get you into the market much earlier which can be much cheaper in the long-run as you’re then locked in at today’s values. It’s important to look at the bigger picture rather than solely focusing on how to minimise the cost of LMI.

LMI Waivers for professionals

Most major banks have an increased appetite to lend more money to people in high-demand and in well qualified professions including lawyers, dentists, doctors, and accountants. These professionals may be eligible for an LMI waiver because they are considered low-risk borrowers. If you are working in any of these professions, this may apply to you.

Gift or loan

If your family is in a position to loan or gift you the money for a deposit it can help you get into the market sooner. 

To ensure this process goes smoothly it’s important that you establish clear guidelines around the gift or loan. Does it need to be repaid and by when? These days loans can even be structured to protect the initial deposit provided by the family member.

Remember too you will still need to prove that you can save as well as afford the loan repayments on your own in order to secure the loan, so having a cash buffer and keeping a lid on spending will still be important. 

Accessing equity from an existing property

If your family members have equity in their home they may be able to unlock it through a redraw or remortgage to provide you with the cash for the deposit. This can be a good option if the cash isn’t readily available but should also be undertaken with care to ensure the family member isn’t worse off. 

Guarantor support

Another option if family members want to help but don’t have the cash available upfront is to have them act as a guarantor on a loan. In this scenario, they offer up part of the equity in their home as security to the lender. In the event that you default on the loan, the guarantor will be liable for the repayments. Again, to ensure you’re not putting the family member at risk and to help secure the loan, it’s a good idea to have a cash buffer in place to prove you can service the loan.

Co-ownership

One way to reduce the amount of deposit you will need to pay is to pool your money together with a family member or friend to buy the property, so you can avoid raising the full amount on your own. This will enable you to skip paying the full deposit, but also means you will need to navigate the pros and cons of owning a property with someone else. Make sure there are clear guidelines in place as individuals’ objectives are likely to change in the future. 

First Home Super Saver Scheme

The First Home Super Saver Scheme enables you to contribute to and subsequently draw on your superannuation for a deposit. The scheme is designed to make it easier for you to save for a deposit by funneling your savings into super where you will pay less tax on it before withdrawing it to put towards a deposit. This will allow you to accrue the deposit faster. 

Government assistance

There are several government initiatives in place which can make it easier to save for a deposit by reducing the deposit amount required. The Family Home Guarantee is designed to help single parents enter the property market by requiring only a 2% deposit without the need to pay lenders mortgage insurance. The government acts as a guarantor on the loan. 

In NSW, the First Home Loan Deposit Scheme works in a similar way, but is designed for any first home buyers who fall under a certain income threshold. There are only 10,000 places available in the scheme so it is competitive. Applications to take part in the Scheme are done directly through a lender. 

First home buyers schemes

Each state has different schemes in place for first home buyers. Typically the schemes will either help you pay for the home (up to the value of $20,000) or waive the cost of stamp duty (land transfer duty). While usually this won’t cover the cost of the deposit, it can reduce the overall financial obligation.

I’m a parent whose child is trying to get on the property ladder: what are the pros and cons of assisting with a deposit? 

If you’re considering helping out your child with a deposit through a gift, loan, guarantor support, releasing equity or co-ownership there are several pros and cons. 

PROS

• Get your child onto the property ladder sooner 
• Providing your child a headstart on financial independence through a one off financial commitment 
• Release what would be your child’s inheritance to your child sooner, when they need it most 

CONS

• The financial commitment may mean dipping into your nest egg which can affect your retirement plans 
• In some scenarios like guarantor support, a loan or co-ownership you are relying on your child’s ability to pay the mortgage and/or pay back the money to you. If they’re not able to do so you will be exposed to risk. You should also factor in what happens in the event your child’s relationship breaks down and they need to divide their assets with their former spouse
• Disputes about money can complicate relationships between parents and children

If you’re looking at options to get into the market without a 20% deposit or you are a parent wanting to help your child with a property purchase, talk to the team at Orium Finance today to discuss your options.