The interest rate is the killer
Around 15% of first home buyers (FHBs) in Australia said they had considered not buying a property at all due to current house prices and the amount needed for a deposit.
Have you considered a mortgage deposit using a credit card?
It can help you cover the deposit costs but it doesn’t get around the genuine savings requirement. Is it the right option for you?
Who will this solution work for?
In early 2016, the Genworth Homebuyer Confidence Index found that around 20% of FHBs had admitted to using a credit card to reach the deposit amount for their home loan. That’s up from 3% in 2013.
However, not all types of borrowers can qualify for a mortgage deposit using a credit card.
Like using a personal loan as a deposit, you need to be in a strong financial position, specifically:
- A high income to afford both the credit card and mortgage repayments.
- Little to no other debt or credit facilities like a card loan.
- A clear credit history.
Do I still need a deposit?
A mortgage deposit using a credit card is really only used as a “top up” or to cover any shortfall in your deposit requirement.
You need at least 5% of the purchase price of the property as a deposit with most lenders so for a $600,000, you need at least $30,000.
So if you’ve only saved $20,000 so far, you could potentially apply for a credit card with a limit of $10,000 to make up the difference.
The problem is the genuine savings requirement!
Even though the credit card has allowed you to come up with the deposit that you need, you generally 5% of the property purchase in genuine savings anyway.
Typically, this would be funds that you’ve contributed to a savings account on a regular basis over a period of 3-6 months.
If you don’t have this, some lenders will accept 12 or even 6 months rental history which means, in this example, you don’t need to have that extra $10,000 saved.
Is there a way to avoid genuine savings?
Yes but not with a mortgage deposit using a credit card.
Apart from using your rental history, you can ask your parents to gift you a deposit for a home loan.
Another solution is a parent assist mortgage where your family essentially loans you the money for the deposit. This is a loan facility is offered and managed by a specialist lender on our panel.
Of course, the most popular solution to avoid genuine savings and having to provide a deposit is with a guarantor loan.
You can actually avoid Lenders Mortgage Insurance (LMI) and borrow 100% of the purchase price plus the costs of completing the purchase including stamp duty and legal fees.
Please call us on 1300 889 743 or complete our free assessment form to speak with one of our non-genuine savings experts and we can let whether a mortgage deposit using a credit card is your best option.
How does this credit card solution work?
Our mortgage broker will firstly need to properly assess your situation to let you know if you’re eligible.
If so, you will need to apply for the credit card but only apply for the limit you need to meet the shortfall in your deposit.
This will either be through ordering a cash advance or using the credit card to buy a deposit bond.
Be careful because you still need to cover the costs of completing the purchase!
This can be anywhere up to 5% of the property value so, in reality, you need closer to 10% of the property value when borrowing 95%.
The good news for high income earners is that you can potentially get a maximum credit card limit of $100,000 so you may find that it’s enough to cover these extra costs.
What are the benefits of this solution?
Get into the property market sooner without having to settle for a cheaper property or one that is in another location.
What are the drawbacks?
You need to be able “service” or afford both the credit card repayments and the loan amount.
Bear in mind, the interest rate on a credit card and cash advances can be upwards of 20% per annum.
For example, let’s say that you took out a credit card for $50,000 to put towards your deposit.
The interest rate is 20% per annum and the minimum monthly repayment of the outstanding credit card balance is 2% or $20.
You just decide to make the minimum monthly payments, which works out to be around $1,017.
If you aimed to pay off the loan in just over 8 years, you would actually have to pay a total of $100,889. That’s more than twice your credit limit in interest!
Let’s say you were looking to buy a property worth $600,000 and you decide that you want to put 10% deposit towards the purchase.
Instead of saving $60,000 yourself, you actually need to spend $110,889 to get the same result. That’s under the condition that you pay out and close the credit card in 8 years.
In total, you’re $60,889 worse off by using a credit card to top up your home loan deposit.
Speak with one of our mortgage brokers
Do you qualify for a mortgage deposit using a credit card and is it right for you?
Call 1300 889 743 or complete our online enquiry form to speak with one of our mortgage brokers.