- Your parents could give you deposit money as a gift or you could inherit the money.
- You could sell an asset, such as shares, to fund your deposit.
- You could use equity in another property you own.
- A first home owners grant can count as part of a deposit.
The genuine savings rule is the tricky issue with the options above (and the fact that not everyone can take advantage of gifts or assets). But if money from a gift, sale or inheritance has been sitting in your account for three to six months most lenders will accept it as genuine savings regardless.
Get a low deposit mortgage
Lastly, you can save a 5% deposit the old-fashioned way and look for a low deposit home loan. There are many mortgages out there which you can get with a 5% or 10% deposit.
How do you spot a low deposit home loan? Look at the maximum insured loan to value ratio (LVR), which should be 90–95%. A 90% LVR means a 10% deposit. A 95% LVR means you only need a 5% deposit. But don’t forget there’s lenders mortgage insurance on top.
There are some state and federal policies to help first home buyers enter the property market. You can build your deposit with this support and minimise your deposit size. While most borrowers won’t be able to use these policies to borrow 100%, it could help them get close.
Here’s how it works. In many states, eligible first home buyers can get a grant of $10,000 towards their first home. There are multiple restrictions, and eligibility depends on the value of the home and often whether it’s a newly-built home or not. These grants can form part of your deposit.
If your home only cost $200,000 (which in many parts of Australia is unlikely) you could actually use the $10,000 grant as a 5% deposit. That’s essentially a 100% home loan because you don’t need a deposit. Although lenders will definitely need to see proof that you are earning (and saving) enough money to repay the loan.
This scheme allows a small number of eligible borrowers to get a home loan with a 5% deposit and avoid paying LMI
The federal government also has a scheme called the First Home Loan Deposit Scheme. This could save you thousands, as LMI for low deposit borrowers can be expensive.
Having a deposit makes you a safer borrower in the eyes of lenders. It demonstrates your ability to save money, and suggests you are financially responsible enough to meet your ongoing mortgage repayments.
There was a time when lenders might give you all the money you need to buy a house without a deposit. In a time when property prices are rising fast, some lenders felt it was safe enough to lend 100%. If you couldn’t repay the loan, the lender could simply sell your property and recover the debt.
But after the 2008 Global Financial Crisis, Australian banks tightened their lending criteria. The American financial collapse proved that if something goes wrong in the economy, property prices can fall at the same time borrowers can’t afford to make repayments. Suddenly those homes aren’t worth as much, and lenders can’t recover their losses.
By tightening their lending criteria, Australian banks and lenders are now better able to lend to people who can realistically afford to repay their loans. By limiting loan-to-value ratios below 100%, lenders can have more confidence that borrowers have some equity in their properties, making them better able to recover debts if the borrowers default on their mortgages.