Let’s face it, saving a deposit for your first home is hard, especially if you’re paying rent and have other debts you need to pay. Generally speaking, lenders prefer a 20% deposit on a standard mortgage and if you’re looking at purchasing a property worth $500,000, then you’d need a $100,000 deposit.
For most people earning average wages, this is just not possible to achieve. Some lenders however, will consider a smaller deposit of say 10% or even 5% but you will then need to pay Lenders Mortgage Insurance (LMI) which will be added to the principal of the loan.
There are however, other ways that you can buy your first home even if you don’t have enough deposit. Let’s discuss these in more detail.
Receive A Gift From Your Parents
Your parents, grandparents or other family members can gift you the money for a deposit. This generally refers to an amount of money which is given to you but which is not repayable. It could also include an inheritance of some type.
There are however, some requirements for lenders to accept your ‘gifted’ deposit. The most important one is that the gifter of the money must sign a statutory declaration to say that the money is a gift and is not repayable.
This type of arrangement is the most common way that most first home buyers can enter the property market.
Showing Lenders That You Can Manage Money
One disadvantage of using a gift from your parents or other relatives is that lenders may not accept this as they generally like to see some sort of savings history to ensure that you know how to manage your money.
There are ways you can get around this though by showing that you are a good money manager and have the ability to repay a mortgage. Here are some things you can do to prove your credit worthiness:
- If you’ve received a gift from your parents or an inheritance, leave this money sitting in a high interest savings account for at least 3 months without touching it. You could even add to it on a weekly basis to show that you are able to save.
- Ensure that you have some sort of savings account to which you’ve contributed on a weekly or monthly basis. This needs to be for a period of 3 months or preferably longer. Even adding your tax refund or bonuses from work to your savings can work in your favour.
- If you’ve been paying rent for the past 12 months or more, then you can get a ledger or rental statement from the property manager which shows your regular rental payments. Some lenders will even accept this as proof of genuine savings, even if you don’t have much cash saved.
Partner With Other Investors Who Have A Deposit
Another way to overcome the hurdle of not having enough deposit is to partner with someone else who has more deposit and then purchase a property jointly. Obviously this may not be ideal if you want to live in the property, unless both parties want to share the accommodation.
It is however, a great way to get into the property market as investors, as after a few years, you can use the equity in the property as the deposit that you need to purchase your own home to live in.
In saying that though, if you have a close friend who you don’t mind sharing a house with, by pooling your resources, you should have enough deposit to satisfy any lender requirements.
Just make sure that you have a partnership contract drawn up which stipulates each person’s share in the property and what happens if one partner wants to sell.
Consider Vendor Finance
Another way to overcome the lack of deposit hurdle, is to consider the vendor loaning you the deposit. This would be for a set period of time and would include an interest charge or a slight increase in the purchase price of the property.
This is most commonly used by property developers to ensure the pre-sale of their properties so that they can get funding from their lenders to complete the building project. In some instances, these developers may even pay the deposit for you just to ensure that their properties are sold.
Ask A Family Member For A Guarantor Family Pledge Loan
This is another scenario which seems to be increasing in popularity and relies on the fact that your parents or another family member own their own home or at least have a fair amount of equity in it.
In this situation, the lender would hold security over the home that you’re purchasing for 80% of the purchase price and place a further security on your parent’s home for the additional 20%.
This effectively eliminates any risk to the lender as they now have 2 properties as security for the borrowed amount.
Another advantage of this type of arrangement is that as your property appreciates in value and you start to pay off some of the principal of the loan, you can have the security hold on your family member’s property removed so that only your home holds all the security for the loan.
Of course, your goal should be to remove the security over your family member’s home as soon as you possibly can.
As you can now see, not having enough deposit to purchase your first home should not hold you back. Consider investigating some of the above options to see which one could be the most viable for you.
In the meantime, keep saving and looking around for an affordable property that you can purchase once you have a solid plan in place.