There has been ample press of late about the plight of Australian first home buyers, and their struggle to make property ownership a reality. With so many fundamentals underpinning the East Coast’s house price surge, first home buyers are more than ever, having to get creative to secure their first home. So what solutions exist to tighter borrowing conditions and huge deposit hurdles?
Low deposit owner occupier loans:
Whilst the major banks will generally be quite happy to lend up to 80% of the property’s value, there are banks that will lend more, sometimes up to 95%. The benefit of this is that the deposit required (the money you need as a down payment) to purchase the property can be as little as 5% of the purchase price. This could significantly decrease the amount of savings you need to get on the property ladder. It is important however, that you speak to a good mortgage specialist about the costs associated with lenders mortgage insurance (LMI) and serviceability requirements.
Gifting a deposit:
It’s an odd reality that a first home purchase generally occurs when you will be earning the least in your career. To make that deposit hurdle just a bit easier, it is becoming an increasingly common trend in Australia for first home buyers to have a portion of, or their entire deposit funded by their parents as a financial gift. A deposit gift could mean you don’t have to spend the years required these days to save the entire deposit, and can instead begin making the regular mortgage repayments – just like paying rent! It is important however that the gift giver speak to their accountant to work out any potential tax and government benefit implications.
Parents as guarantors:
For first home buyers where parents have over time created equity in their own home, you may be in a position where your parents can act as guarantor on your first home loan. A guarantor loan has the benefit of increasing borrowing capacity. So how do they work?
For first home buyers, a guarantor loan can often enable the borrower to borrow more than 100% of the purchase price of the property they wish to buy. This can help decrease the size of the deposit required and provides funds to pay for buying costs and other expenses. The guarantor, who is usually the first home buyer’s parents, will provide a guarantee for the home loan which is secured against a portion of their property’s value. Once the FHB has paid off part of their loan or the property has increased in value, then the guarantee can be removed. The benefits of a guaranteed home loan are:
- The deposit required to enter the market is reduced substantially
- Generally, no requirement for lenders mortgage insurance (LMI)
- Flexibility around the size of the guarantee
The boring option:
Buying a first home can be both one of the most daunting but also most exciting rite of passages and something genuinely worth working hard for. Prior to making that first purchase, there are a few additional steps first home buyers can take to sure up their borrowing position:
- Save save save: There is often no substitute for genuine savings– whether that means moving back home, cancelling memberships and discretionary expenses, a solid saving pattern for at least 12 months proves to prospective lenders that you have the discipline and track record to repay a loan once committed.
- Pay down existing debts: In the eyes of the banks, the cleaner your credit history – the better. Clearing those existing credit card, car or consumer debts will ultimately improve your borrowing capacity
At the end of the day, being well informed and armed with up to date information can provide clarity and options when looking to enter the real estate market for the first time. This is where having a relationship with a quality and reputable mortgage broker is of huge value. The best thing is, their services are at no cost to you and could save thousands over the life of your property loan. If you wish to speak to an award winning finance team, contact red and co by email on [email protected] or call 1300 88 73 28.