Can you buy a property with less than a 5% deposit?
A guarantor loan is the best way to avoid having to come up with a deposit but capitalising LMI, state grants and a personal loan can also help to reduce your deposit requirement.
As long as you’re in an otherwise good financial position, a 3% deposit home loan can help you avoid missing out on your dream home.
How does it work?
Capitalise the LMI
A 3% deposit home loan is actually a 95% home loan with the cost of Lenders Mortgage Insurance (LMI) added or capitalised on top of the loan
For a 95% home loan on a $600,000 property, you’re potentially looking at upwards of $28,000 in LMI!
By adding this fee on to the loan, you avoid having to pay this cost upfront.
So if your home loan was $570,000, the lender would add $28,000, bringing the total loan amount to $598,000.
The beauty of a 3% deposit home loan is that:
- You need a much smaller deposit to get approved for a home loan.
- There is no interest charged on the LMI premium.
- You will simply pay off the LMI along with you normal mortgage repayments.
- You can get the same interest rates as a normal borrower.
You’ll still be left with a 2% shortfall!
Generally speaking, you’ll still be left with a 2% shortfall despite capitalising LMI.
This shortfall is for other associated property purchasing costs such as stamp duty and legal fees.
If you can’t cover these extra costs, there are 3 options available to you:
- Your parents may be in a position to act as a guarantor so you won’t need a deposit and can avoid the cost of LMI altogether.
- In some states you may qualify for a first home owners grant which may be enough to cover the shortfall.
- If you’re on a high income with no or very few debts, you may qualify for a personal loan to cover these extra costs.
Speak to a mortgage broker about a 3% deposit home loan by calling 1300 889 743 or by completing this free assessment form today.
Will I get approved?
You’ll need to be in an otherwise strong position to borrow at such a high Loan to Value Ratio (LVR).
For the lender, it’s all about mitigating risk:
Good income, asset position and stable employment
When the bank calculates “serviceability” or your capacity to afford the mortgage, they will look at your income and minus any of your current debts and liabilities.
Generally speaking, having debts and liabilities of more than 5% of the purchase price can be a red flag for approval simply because you’re borrowing at such a high LVR.
Overall, your net asset position should enough to afford the repayments without you falling into financial hardship.
The consistency of your income is important as well and this goes hand in hand with a good employment history, typically 6-12 months in your current job role.
Apart from serviceability, the bank wants to know that you’re of good character.
Clean credit file
Pay your bills, rent, credit card repayments and other commitments on time over at least 6 month period to ensure that your credit file is clear of black marks like defaults, judgments and court writs.
Not all property types and locations are accepted
Banks are reluctant to approve a 3% deposit home loan for security (a property) that will likely be difficult to sell in the event that you default on your repayments.
The same goes for properties in rural locations.
Check out the property types page for more information and try out the postcode calculator to get an idea of what banks think.
Where can my deposit come from?
One of the problems with a 3% deposit home loan is that although you don’t need a big deposit, you still need to have 5% in genuine savings.
What does that mean?
Well, it all comes back to demonstrating character and capacity.
You’ll typically need to show this with a 3 months savings history showing regular deposits into a bank account amounting to 5% of the purchase price.
There are other things that can count towards genuine savings such as a term deposit and a rental ledger, however, there are non-genuine savings options out there.
You can borrow 100% of the purchase plus costs and you don’t need genuine savings. Call us on 1300 889 743 to find out more.
If a guarantor doesn’t quite work for you, there are still more options:
- A gift from your parents: This must be a non-refundable gift and you’ll need a gift letter.
- First Home Owners Grant (FHOG): You can use this towards the 3% deposit.
- Personal loan: Yes, it is possible but you need to be in a strong financial position.
How much would deposit would I normally need?
For most banks, borrowing anything over 80% of the property value (80% LVR) is seen as a high risk.
Imagine trying to save a 20% deposit.
For a $600,000 property, that works out to be $120,000. That’s not including the costs of completing the purchase such as stamp duty and legal costs.
Depending on the state you live in, you have to add an extra 2-3% to this deposit, so you’re potentially looking at roughly $138,000 all up.
How LMI can make a huge difference
To make it even more difficult to save a deposit, banks apply a fee known as LMI when you borrow more than 80% LVR.
This fee is charged to the bank by their mortgage insurer due to the risk of the loan. You’re essentially paying their premium and it protects the bank, not you, if you’re unable to pay your mortgage.
Most borrowers focus their attention on getting a cheap interest rate but rarely do they consider LMI premium rates.
The worst part is that you normally have to pay this upfront along with the costs of completing the purchase.
There goes nearly all of your deposit if you only have 5% saved up!
That’s the reason why, in reality, you actually need closer to a 10% deposit just to qualify for a standard home loan.
This is where a 3% deposit home loan can help.
Do all lenders cover the full amount for LMI?
Generally speaking, LMI works out to be around 2% of the property value, although, depending on the property’s purchase price, it’s usually closer to 2.5% to 3%.
Did you know that some lenders will only lend you 2% of the property value to cover the cost of LMI?
Luckily, not all banks have the same policy and will cover the full amount for LMI even if it goes over the 2% mark so you can essentially borrow up to 97.5-98%.
When it comes to a 3% deposit home loan, choosing the right lender is essential.
You can get a more accurate estimate of the cost of LMI for the property that you’re looking at buying by using our LMI calculator.
Alternatively, the government announced a home loan deposit scheme for first home buyers wherein, if you have a 5% deposit, then you don’t have to pay any LMI fees.
Under the scheme, the government will guarantee your home loan up to 15% which including your 5% deposit takes it over the 20% threshold for no LMI.
Ask about a 3% deposit home loan!
Speak to a specialist in low deposit and no deposit home loans.
Call 1300 889 743 or complete our online enquiry form and we can tell you if you qualify for a 3% deposit home loan.