It’s a common misconception you can only buy a home if you have a 20% deposit. These days, you can get a home loan with as little as a 5% deposit! While this may sound like a no-brainer in theory, it may cost you more in the long run.
Some lenders will allow you to get a home loan with a 5% deposit, however, you may have to pay a higher interest rate than if you had a 20% deposit.
Additionally, you’ll be required to pay Lenders Mortgage Insurance (LMI). LMI is insurance that covers the lender’s losses should you no longer be able to make repayments, also known as a default. If you have anything less than a 20% deposit, you’ll be required to pay LMI. This is because you’re seen as a higher risk borrower and without this insurance policy, the lender is unlikely to lend to you.
LMI can be extremely costly. For an estimated property value of $800,000, with only a 5% deposit, you’d pay almost $35,000 in LMI, according to the Genworth LMI premium calculator.
If you’re a first home buyer and you’re struggling to build up a house deposit, but also don’t think you can afford LMI, there is another option available through the First Home Loan Deposit Scheme (FHLDS).
Launched at the start of 2020, the FHLDS is a Federal Government scheme designed to make it easier for first-home buyers to enter the housing market.
First-home buyers with at least a 5% deposit will not be required to pay LMI, with the government acting as a guarantor for the rest of the deposit. This money doesn’t go to the borrower, but is rather a guarantee the government will pay what is owed to the lender should the borrower default on the loan.
Only Australian citizens are eligible for the scheme with only 10,000 places available from July 1. For singles to be eligible their taxable income cannot exceed $125,000 per year. For couples, their joint taxable income cannot exceed $200,000, and they must both be first-home buyers. Couples must also either be in a de facto relationship or married. Applicants must also be owner-occupiers, not investors.
Although the FHLDS sounds great in theory, there are some caveats. If you were looking at buying a home with an estimated property value of $800,000 with a 5% deposit, at an interest rate of 3% over 25 years, your total repayments would be $1,081,202. Your monthly home loan repayments would be $3,604. With only a 5% deposit, you’d be required to pay $31,939 in LMI.
In contrast, if you were looking at buying a home with an estimated property value of $800,000 with a 20% deposit, at an interest rate of 3% over 25 years, your total repayments would be $938,938. Your monthly repayments would be $3,130.
So, buying the home with only a 5% deposit would see your monthly repayments would be $474 more than if you had a 20% deposit. If eligible for the FHLDS you wouldn’t have to pay LMI, but this would still cost you $142,264 more in interest payments. If you weren’t eligible for the FHLDS, you’d pay a whopping $174,203 more than if you had a 20% deposit.
Both these oversimplified examples also assume interest rates don’t rise at any point throughout the life of the loan. Interest rates are the lowest they’ve ever been and the Reserve Bank has said it won’t raise the cash rate until at least 2023. However, interest rates are almost certain to rise at some point in the next 25 years, which would see this margin increase even further.
It’s recommended you save up a 20% house deposit to pay less interest overall and avoid LMI, but this may mean you have to put off your dream of buying a home for a few years. If you still aren’t confident you can save a 20% deposit, consider getting to at least a 10% deposit. This would lower both the interest paid over the life of the loan and the LMI you’re required to pay.
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