If you have ever tried applying for a home loan before you may have heard from friends or family who have already been approved for one that you are going to need at least a 20% deposit. That means you need to save that amount for you to be approved.
However, you might be surprised to learn that while you don’t have to save that much, one of the best mortgage brokers in Sydney recommends that you do:
What Happens If I am Not Able to Raise the 20% Home Loan Deposit?
There are different ways you can get a home loan even with a smaller deposit. That said, you should know that you are likely to incur additional complications and maybe even extra costs. It’s because lenders will see you as high risk if your deposit is less than 20%.
What’s your option then? There are low-deposit home loans or what’s also called high Loan-to-Value Ratio home loans. If you get approved for this type of loan you can pay as low as just 3% for your home loan deposit.
One of the additional costs that you may have to pay for a low-deposit home loan is Lenders Mortgage Insurance. This insurance protects the lender in case a borrower ends up defaulting.
Here’s how it works. Say you are planning to buy a property worth $500,000 and you can only raise a 10% deposit of $50,000. With LMI, a lender might let you take out a home loan even with as little as a 5% deposit if you are going to be classified as owner-occupier or 10% if you are considered an investor.
Sounds enticing? Here’s the catch – you’ll have to pay the cost of LMI and your mortgage will be more expensive, too.
Should You Buy and Pay LMI Now or Just Save for a Larger Deposit?
The answer depends on a few factors, including the market itself. If the market is good, it makes sense to pay LMI upfront because you know the value of the property will rise over time and you’ll have to match that with your deposit, too. So, you want to get it before the price tag hikes.
However, if the market isn’t really growing in value, then you might want to just wait until you have saved a bigger deposit because a larger deposit will give you a better deal on your loan as you have a lower LVR.
First Home Loan Deposit Scheme to Avoid LMI Payment
Through the First Home Loan Deposit Scheme, first-home buyers can secure a home loan with as low as a 5% deposit even without paying LMI. In this particular scheme, the government serves as the mortgage insurer that guarantees home loans for qualified first-home buyers with just a deposit of at least 5% of the value of the property.
Guarantor Loans for Buying Without a Deposit
Aside from the government, you can also use other guarantors for your loan. Most of the time, parents do this for their children. Guarantor loans cost less than your standard home loans and let you buy without a deposit. Aside from that, you can borrow even 100% of the property value.
Why It’s Recommended That You Save a 20% Deposit
A bigger deposit can get you a better deal because a home loan amount that is no more than 80% of the home value is a low-LVR loan. Because the risk for the lender is lower when the LVR is lower, too. Additionally, you won’t have to pay the LMI if you have a deposit of at least 20% so you’ll actually be saving money. You’re more likely to be approved faster with a 20% deposit as well.
All the best mortgage brokers will tell you that while there are ways to get approved for a home loan with less than the standard 20% deposit, it’s still highly advisable that you save that amount. This will ensure that you get a better deal and that your monthly payments will be more affordable, too.
When you’re ready to apply for a home loan, Wealthy You, one of the best mortgage brokers in Sydney is here to provide you with different mortgage solutions so you can find one that suits your needs.