If you’re wading into ‘should I buy a home’ territory, you might have heard this a few dozen times:
“Save up a deposit of at least 20%!”
So, you get a job, you get a budget together (yes, it’s a note on your phone but a budget is a budget!), you‘ve cut out takeaway, you’re meal prepping lunch, you live with your mates to save on rent and you put away money every pay day into your Bonus Saver.
And yet, you still don’t quite have even 5%, let alone 20%.
So HOW do you purchase a home?
There’s a new kid on the block that we want you to know about.
Take your 5% and apply for the First Home Loan Deposit Scheme
The Federal Government launched the First Home Loan Deposit Scheme at the start of 2020. We’re going to call it the FHLDS from now on because it’s quite long. We’re pronouncing it ful-dus.
This FHLDS combines the best parts of the 'usual' ways to get a deposit together:
- It helps you (sort of) have a 20% deposit,
- with a guarantor (the Government, instead of your Mum and her house),
- with an actual deposit of as little as 5% AND you avoid paying LMI.
How good is that?
If you successfully apply for the FHLDS through us, you won’t have to pay LMI because the government guarantees the rest of your deposit, so long as you have at least 5%. Depending on what state and region you live in, you may also avoid paying stamp duty. In Victoria, if you purchase a home with a loan worth under $600k, you are exempt from (don’t pay) stamp duty.
That’s a great thing; LMI and stamp duty are expensive and can take a chunk out of your deposit, bringing it way further down than what you anticipated. Read more about the Federal Government’s FHLDS, T&Cs, applying through us and registering your interest.
If ful-dus is no good, and you don’t meet the requirements, here are 3 options to explore.
Option 1: You keep saving for 20%
An ideal deposit is 20% (at least). This would make the home loan 80%. We promise banks didn’t just pick this out of the air – it’s the amount you need to save for so you can avoid paying Lender’s Mortgage Insurance (LMI). LMI is something you pay another company (the insurer) in case you can’t repay your mortgage. The lower your deposit = the more the bank lends you = the riskier it is for the bank that that you may not be able to repay.
Be prepared for this: LMI is expensive. We’ve explained LMI in our home loans glossary.
We’ve also explained deposits more in ‘How much will I need for a deposit?’
Option 2: You get a 95% loan with a 5% deposit
Yes! You can actually get a loan with a 5% deposit.
The catch: You have to pay LMI.
If you only have a 5% deposit, you’ll have a loan to value ratio (LVR)* of 95% and you’ll have to pay LMI. Banks and other lenders do allow 95% loans but they come with a few more rules than a loan value of 80%. Why? Because the more we lend in a given loan, the riskier it is – for us and for you.
*“Bank Australia, WTF is a LVR?” Read more about loan to value ratios in our home loan glossary.
Option 3: You get a guarantor
A guarantor is someone who can guarantee the payment of your home loan if you are unable to pay it. Think of a guarantor as the bank’s back up plan. Having a guarantor also means you may avoid paying LMI.
A parent, family member or friend agreeing to be your guarantor is a big deal – it means they’re taking on the legal and financial risk of you not paying all or part of your loan.
Having a guarantor is also a big deal because it’s not available to everyone. A guarantor has to also own property because the equity in their home (the part that they own, not the part that is still mortgaged) is the security for your loan.
And some people don’t have anyone they can rely on, even if they do know people who own property. What we’re trying to say is: if you do have a guarantor, consider yourself pretty darn lucky.
For all things home loans, head to our home loans hub. You'll find more info, our glossary and calculators, all in aid of helping you purchase a property.