One of the big questions being asked in the market is how can new buyers get into that first home when they haven’t got enough saved for a deposit? We asked Chris Wisbey, National Sales Manager at Mortgage Mart of Australia to outline some of the options available to first home buyers when they don’t have the deposit required to purchase their dream property.
The reality is that squirrelling your GOFAD’s (Good Old Fashioned Aussie Dollars) away is a tough task for many and in real terms, can take years to reach the Banks criteria of a minimum deposit or contribution.
There are a lot of bright, shiny and costly distractions out there competing for your hard earned dollars which means getting to the traditional start line for a home loan is that much more difficult to achieve.
So, for you first home buyers out there, you ‘ve got to make some realistic choices if you want to get into your first home sooner. Today we’re going to look briefly at some alternate ways you can use a Funders lending guidelines to your advantage particularly if the 5% genuine savings deposit is not in your hands right now.
The Bank of Mum and Dad (BMD)
Ever reliable avenue to leverage (mooch) bail out funding and provide a non refundable gift. This is the most common method of parental support for grateful kids buying a first home. However, the problem with this gift is that the loan being sought often remains in the very high Loan Value Ratio (LVR) range and that of course translates out to being a hefty Mortgage Insurance premium on top of the loan.
Yes, the First Home Owners Grant (FHOG) may be available but it is generally consumed in fees payable to the Lenders Mortgage Insurance (LMI). Pretty much every Bank or Lender can work with this arrangement or other parental support programs but be warned, they may have impacts on FHOG eligibility.
Alternate Option 1 | Parent to Child Program (P2C©)
Straight up, this option will only be applicable to a small community of potential buyers. With this option the BMD have the financial means to assist their little darlings to a higher degree and eliminate that high Mortgage Insurance premium.
Using a managed investment fund that is controlled and enabled by a specialised lender, the BMD can invest, say 20% of the purchase price of the ideal property, into a purpose built managed fund that is then made available for the child to satisfy deposit and costs.
The child then seeks a home loan (through the same lender) for the balance of the purchase price, so 80% LVR. Obviously the Mortgage Insurance Premium is then not applicable, saving a bucket load in LMI fees.
Importantly, there are some serious built-in safeguards for all parties with this facility all designed to protect everyone’s interests and at the same time Mum & Dad are supporting their kid(s) with as an investment product that they control the rate of return.
Alternate Option 2 | Borrowing up to 100% of the Property Value
This spicy option is only really for those 1st timers who have great income, recognise they are on the beginners rung of the property ladder and, importantly, are ready to commit to a major change in lifestyle to accomplish their home ownership dream. It is absolutely true that there are some Australian lenders who accept the fact that some clients don’t have genuine savings and at the same time will accept a home loan application of up to 95% of the purchase price.
Assuming the Bank of Mum & Dad is not in play to make up the deposit shortfall, can these clients use borrowed funds to complete the transaction? The short answer is yes.
This option certainly is available however it is imperative to look longer term in that borrowing 100% will mean repayments are higher because they will be paying both a home loan and a personal loan every month. Now in a perfect world, the property should appreciate in value over time and as it does the opportunity to refinance into a more mainstream home loan should become available.
It’s probably a good idea to look longer term at the property in that it may be a good first home to get into the property market with but also will also stack up to potentially be a great first investment property as time goes by.
As with any financial product, we always recommend you do your homework. The best way to discuss your particular financial situation and needs is to talk to one of our professional mortgage brokers who can provide quality advice on the right lending options for you and any specific offers currently available in the market as of today.