With rapidly increasing real estate prices, it is difficult for many to save for a home and take care of other expenses. It may take several years before one has enough money for the home deposit required to enter the property market.
While lenders prefer a deposit of at least 20 per cent of the property’s purchase price, with low deposit home loans, you can get much more flexibility. For example, you can enter the real estate market by depositing only 5 to 15 per cent, allowing you to get 80 per cent of the property value as a loan.
Below is every detail you must know to make an informed decision regarding your home loan.
What does a low deposit home loan entail?
A low deposit home loan is one where your lender accepts a deposit of less than 20 per cent of the property’s value. These loans are also called high LVR loans, where the initial deposit amount ranges between 5 per cent and 19 per cent.
If you are a first-time home buyer or working with a strict budget, low deposit home loans can be your best option. By depositing the initial sum of money, you secure a loan with your lender. This will give the lenders the security to lend and reduce their risk.
This kind of home loan has high rates of interest and monthly payments. In some cases, borrowers also enjoy similar rates to that of a standard home loan.
What is the loan-to-value ratio (LVR)?
The loan-to-value ratio is the calculation done by the lenders while assessing a loan application. It is calculated by dividing the home loan amount by the appraised value or the property’s purchase price.
LVR is associated closely with your deposit size, meaning an LVR of 80 per cent will require about a 20 per cent deposit. Low LVR is associated with low levels of risk to the lender.
Also, remember when you borrow 80 per cent of the property value, you need to pay the Lenders Mortgage Insurance (LMI). This can protect your lender if you cannot make loan repayments on time. Hence, if you want a low deposit loan, you might have a budget for this extra cost.
Why should you consider a low deposit home loan?
If you can successfully apply for low deposit home loans, you can get a wide range of benefits. Below are some reasons why you can opt for a low deposit loan:
- You must deposit 5 per cent of the property value as the minimum deposit. For example, if the property value is $500,000, you need to deposit only $25,000. This way, you can save on repayments and other expenses and enter the property market much sooner.
- When you take a loan, you prevent wasting money on rent payments and instead redirect it to loan repayments. Hence, you can become the property owner and benefit from its appreciation.
- With low deposit loans, you can also have a guarantor to secure your loan and get a jumpstart on your loan application. Also, when you have a guarantor, you don’t have to worry about paying the Lender’s Mortgage Insurance which can help you save several thousand dollars. However, before getting a guarantor, both parties should discuss the details and consequences if the borrower fails to make repayments.
Low deposit loans can make the journey to your home purchase much smoother. However, make sure you don’t have any outstanding payments, personal loans, or rent obligations when you apply for the home loan. Also, have a good and consistent income source so you can make the repayments timely.