If you’re a first home buyer struggling to save a deposit, you may be able to borrow the entire purchase price of a property from some lenders if you meet certain conditions, such as having a family member guarantee your home loan. That being said, no deposit home loans are pretty uncommon, and you’ll generally require a minimum 5% deposit to qualify for a home loan. If this is the option you choose, you’ll most likely pay Lenders Mortgage Insurance (LMI) to cover the lender’s risk in case you’re unable to make your home loan repayments in future.
LMI is an insurance policy that covers the mortgage lender against any potential losses if you cannot make your home loan repayments. You can either pay the LMI costs upfront to your lender or add the amount to your home loan. If the LMI amount is rolled into your mortgage, you’ll pay interest on it just like the rest of your home loan.
Depending on the size of your loan and the property you’re buying, LMI can run into thousands of dollars, adding to your house buying costs. Whether you choose to pay LMI or wait for a few more years to save a larger deposit is a choice only you can make. Meanwhile, also consider the following options if you plan to buy a home with a low deposit (or no deposit) and don’t want to pay LMI.
1. Seek help from the “Bank of Mum and Dad”
The Bank of Mum and Dad can help you put up a sizeable deposit by gifting you the money you need. This is known as a gifted deposit, and most lenders will accept it as part of your initial down payment for the home. However, you’ll still have to demonstrate at least 5% genuine savings in addition to the gifted deposit to qualify for a home loan. If you’re renting a house, some lenders may waive off the genuine savings requirements if you can provide proof of timely rental payments made over a year or more.
If you’re using a gifted deposit to purchase a home, make sure to keep a paper trail to substantiate the gift. You can have a declaration signed by your parents stating that the money is gifted, which implies you’re not expected to repay the money.
2. Ask a family member to guarantee your home loan
Some lenders may let you borrow up to 100% of the property value if you have a family member guaranteeing your home loan. However, if you fail to make your repayments, your parents (or any other family member guaranteeing the loan) will be liable to pay on your behalf.
3. Apply for First Home Owners’ Grant (FHOG)
If you’re a first home buyer, you may be eligible for FHOG in your state to boost the size of your deposit. The scheme was rolled out in 2000, and you must fulfil the required criteria in your state to be eligible for the funding. Visit the First Home website for the latest information on FHOG.
4. Have the government guarantee your home loan
The First Home Loan Deposit Scheme is essentially a government guarantee that lets you buy your first home with a 5% deposit and no LMI. However, the guarantee is limited to 10,000 first home buyers in a year with an income cap of up to $125,000 per year for individuals or $200,000 per year for couples.
Another extension of the scheme is the Family Home Guarantee that enables eligible single parents with dependants to purchase a house with just a 2% deposit and no LMI.
It’s worth remembering that a government guarantee is different from a government grant. While you don’t have to repay the amount you receive under FHOG, the First Home Loan Deposit Scheme is only a guarantee. It enables you to borrow money for your first home with a low deposit, increasing the overall size of your borrowing. However, irrespective of your loan size, you’re required to repay the money in a limited time frame of 30 years or less. Therefore, it’s important to calculate your monthly repayments before borrowing a larger percentage of the property’s price to avoid mortgage stress.
Your credit score is a number that represents your financial history, and is used by lenders to determine how much risk you pose as a borrower . Your score is calculated from the information contained in your credit report, such as the number of debts you are responsible for, whether you’ve been making timely repayments or not, your credit card limits, etc.
Depending on the credit reporting agency, your credit score may sit between zero to 1,200, as each of the three major agencies use a different range when categorising consumers’ scores. However, your individual score will usually be similar across all three reporting agencies, as the information used to derive the score is the same. Even though what constitutes a good credit score may differ according to the reporting agency, generally a score above 600 is considered good, and 750+ is considered very good.
Having a good credit score means lenders are more likely to approve your application for credit than someone with an average or poor credit score. Lenders also tend to reserve their most competitive rates for borrowers with a high credit score. So, you’re more likely to qualify for a loan with a lower interest rate and favourable terms when applying with a high credit score.
On the other hand, a poor credit score could make it difficult for you to qualify for a loan or any other credit product, or you might be charged a higher interest rate or fees. If you’re planning to apply for a home loan or any other credit product in the near future, it’s worth checking your credit score online to see where you stand. There are plenty of websites that allow you to check your credit score for free. If you do find that your credit score is lower than you need it to be, don’t worry. We’ve put together some simple tips that can help you improve your score over time.
How to fix a low credit score?
There are two steps to fixing a low credit score. The first is getting a copy of your credit report (preferably from all three credit agencies) and checking it for errors. Some of the mistakes that might creep into your credit report are:
Duplicate listings
Incorrect amounts of outstanding debts
Credit applications not made by you
Repayments made by you that were not recorded
If you find information that has been listed incorrectly, you can report it to the relevant credit agency for investigation. Once the error is confirmed, it will be corrected on your report and automatically reflected in your credit score.
Try not to fall for credit repair agencies that charge you for repairing your credit, as they can’t do much more than spotting errors on your file, which you can easily do on your own.
Apart from correcting any errors, the other way to improve your credit score is through positive changes in your financial behaviour.
1. Pay down your debts diligently
Under the Comprehensive Credit Reporting scheme, both positive and negative behaviours impact your credit score. So, paying off your debts promptly, including your mortgage and credit cards, can help improve your credit score by creating a record of consistent and timely repayments.
2. Pay your bills on time
Paying your telephone and utility bills on time can help improve your credit. A late payment of more than $150 may be listed on your report as a default when overdue for 60 days or more. Such defaults can stay on your file for up to 5 years, and you cannot have them removed by paying your bill late. It’s worth budgeting for regular expenses and setting up an auto-debit from your account to make sure your bills are paid on time.
If you move house, remember to update all relevant parties, including your local post office, utility providers and lenders, with your new details to make sure you receive your bills on time. You might also want to opt to receive your bills by email to avoid confusion and to save paper.
3. Lower your credit card limits
While it can be good to have a higher credit limit in case of emergency expenses, in some cases you might find that it actually ends up hurting your credit score. This is because your credit report doesn’t reflect the amount you spend on your card. Instead, it’s your credit card limit that’s shown on your report and used to calculate your credit score.
So, if your combined credit card limit is $10,000, that’s the amount that will show on your file, irrespective of whether you only spend $1,000 of that. Lowering your credit card limit reduces the amount of active credit on your file, which may increase your borrowing capacity and boost your credit score.
4. Use your credit cards wisely
Not having a credit history will also lead to a low credit score. One of the simplest ways of building credit is by using a credit card, but you need to be aware of the costs and risks involved. While credit cards offer an easy method to pay for your day-to-day expenses, they also make it easier to fall into a debt trap, making it easier to spend more than what you earn. Therefore, it’s important to budget and set limits on your credit card spending to make sure you’re able to pay your bill in full each month to avoid penalties and high interest charges.
5. Avoid making multiple applications for credit
Whether you’re searching for a home loan, personal loan, or a new credit card, shopping around for the best deals on the market can help you boost your savings. But while it’s okay to compare deals online, making multiple applications for credit too close to each other can impact your credit score negatively. That’s because a credit provider pulls out your credit report each time you make an application for new credit. Such inquiries are listed on your credit report. If a lender sees multiple inquiries on your report in a short duration, they may suspect some kind of financial trouble. Such inquiries reduce your credit score slightly, but multiple inquiries can add up to have a more significant impact.
If you’re looking for a home loan, you can always speak with a mortgage broker to narrow down your search to lenders most likely to approve your application. A broker will also help you find a loan that’s competitive and suitable for your requirements to help you get the most out of your mortgage.
Lenders Mortgage Insurance (LMI) is a type of insurance that covers a lender’s financial risk in case a borrower defaults on their mortgage repayments. It’s usually required when a borrower applies for a home loan with less than a full deposit.
Generally, the smaller the size of the deposit, the higher the cost of the LMI. The amount of LMI payable also depends on the size of the loan, and can often run into tens of thousands of dollars. You can use an online LMI calculator to get a fair estimate of how much extra you’ll need to shell out in LMI fees for a low deposit home loan.
How does LMI work?
Let’s assume you default on your home loan, and there’s still $550,000 owing to the lender. After repeated reminders, you fail to make the repayments, and the lender eventually sells the property to make good its losses. However, the lender only receives $500,000 in sale proceeds, leaving a shortfall of $50,000.
Normally, the lender can attach your personal assets to recover this shortfall. However, when you pay LMI, the lender can claim the shortfall from the insurer instead of coming after your assets.
Homeowners often confuse LMI with mortgage protection insurance, which is a different product altogether. While LMI only protects the lender in the case of default, mortgage protection insurance is designed to help with your repayments if you become seriously ill or meet with an accident (as laid down in the insurance policy).
Is it worth paying for Lenders Mortgage Insurance?
Most lenders require you to pay at least 20 per cent of the property’s price upfront as a deposit. However, saving a full deposit is no mean feat. Recent data indicates first home buyers take about eight years to save a deposit for a home in Sydney and a little less than seven years for a house in Melbourne. The “steep deposit burden” restricts many first home buyers from entering the market unless they are able to get support from their parents in the form of cash or a home loan guarantee. Alternately, first home buyers can consider paying for LMI to qualify for a home loan with less than a 20 per cent deposit.
Overall, LMI might prove to be a useful tool if you wish to enter the property market sooner without having to save a full deposit. This could be the case if you think you’re in a property market where prices are likely to hike faster than you save. Or, you’ve come across a rare deal on your dream home that’s too good to miss, and it’s going to remain a profitable deal despite the extra LMI fee.
On the flip side, the cost of LMI can run into several thousands of dollars and add to your debt. If you’re already struggling to save a deposit, you might find it difficult to foot the LMI payment upfront. Some lenders may allow you to roll the LMI into your loan, but you’ll then be charged interest on the additional amount, along with the rest of your loan, resulting in higher monthly repayments.
It’s also worth noting that LMI premiums are usually not refundable. While you may be able to transfer your loan to another property using the mortgage porting feature, you generally cannot transfer your LMI to another lender. This means you could be required to pay LMI again while refinancing if you borrow more than 80 per cent of the property’s price.
The answer to the question of whether it’s worth paying for LMI depends on your personal goals and circumstances. For instance, you may find paying LMI worthwhile if it gets you into a volatile property market sooner. On the other hand, you might find it practical to wait until you have an adequate deposit to save on LMI costs and potentially qualify for a better rate on your home loan. It could help to discuss your options with a mortgage broker to select the right course of action for you.
How can I avoid paying LMI costs?
Paying for LMI can help you purchase your home sooner, but it can also add thousands to your home loan costs. One of the simplest ways to avoid paying for LMI is to save up a 20 per cent deposit for your purchase. Even if you can’t meet the 20 per cent goal, it’s worth saving as much as you can to reduce your potential LMI costs.
Another option that first home buyers may consider is a guarantor home loan. If you can get a parent or other close relative to guarantee your mortgage with their own property, you could avoid paying for LMI despite having a low deposit or even no deposit in some cases.
However, taking out a guarantor home loan places more responsibility on your shoulders. If you default on your mortgage repayments, your guarantor will be responsible for making the payments. If both you and your guarantor fail to meet the home loan repayments, the lender may sell your house, followed by the guarantor’s property, to pay for any shortfall. Therefore, it’s important for all the parties to be aware of the risks before signing up for this option.
Depending on the state in which you’re buying, you may be able to take advantage of state and federal grants to beef up your deposit. For instance, most states and territories offer the First Home Owner’s Grant (FHOG) to help first home buyers get into their homes sooner. You can check your eligibility for FHOG on your state’s website.
The federal government’s First Home Loan Deposit Scheme allows eligible Australians to buy their first home with just a five per cent deposit and no LMI. Single parents with dependent children can purchase a home with only a 2 per cent deposit under the Family Home Guarantee. However, both the schemes have a range of eligibility criteria to fulfil, and only a limited number of spaces are made available in each financial year.
You may also check with your broker if you’re eligible for an LMI waiver. Certain professionals like doctors, lawyers and accountants are often considered low-risk by lenders. If you belong to any of these professions, you might be eligible for a professional discount that lets you borrow up to 90 per cent of the property’s value without paying for LMI.
If you’re planning to buy your first home, you’re likely to apply for a home loan to fund your purchase. Therefore, it makes sense to find out about your borrowing capacity before you go house hunting to avoid getting disappointed at a later stage. For instance, you might like a property but when you apply for a home loan you realise you can’t afford it, as your borrowing capacity is lower than what you planned to borrow.
Getting a fair estimate of the amount you can borrow, helps you narrow down your search. It also enables you to figure out your future repayments so that you don’t spread yourself too thin while buying a house.
What Do You Mean By Borrowing Capacity?
Your borrowing capacity is the maximum amount of money a lender is willing to lend you for purchasing your house. It depends upon your home loan serviceability, which is calculated using a complicated formula by lenders. Most lenders rely on multiple factors to work out this amount. While the criteria may differ for different lenders, some common factors affect your borrowing capacity. These include your income details, current assets and debts, credit card limits and general living expenses. You can use a borrowing capacity calculator to roughly figure out how much you might be able to borrow by entering your income and expense details.
Another factor that impacts the amount you can borrow is your deposit size. Most lenders require you to provide a 20 per cent deposit to be eligible for a home loan. Some lenders may allow you to borrow with a lower deposit, but you might have to pay lenders mortgage insurance (LMI) fee. This is a one-time insurance premium payment that protects the lender against any losses if you default on your loan anytime during the term. However, some low-risk professionals like doctors, lawyers and accountants might be eligible for an LMI waiver. You can speak with your mortgage broker to check your eligibility for any professional discount or offer.
Borrowing Capacity vs. Home Loan Affordability
Your borrowing capacity is just an estimate of the amount you can borrow to purchase a house. However, you’re also required to repay what you borrow (along with interest!) within a specified timeframe of 25-30 years. Considering that your home can be one of your most expensive investments and a financial commitment, it’s essential to work out a budget and check whether you can afford the repayments on your home loan or not.
Interestingly, the amount of money you’re eligible to borrow might be different from what you can afford to borrow (or repay, to be precise). For instance, you may have poor credit on your file, which will reduce the amount you can borrow. But your financial condition might have improved over the years, and you can afford a higher repayment in your present situation. If that’s the case, you may consider discussing your situation with a broker to apply for a specialist home loan. You could also choose to wait it out while following these tips to repair your credit.
Conversely, you might be eligible for a higher loan amount that you cannot service. It’s worth using a mortgage repayment calculator to figure out a reasonable amount that you can repay without running yourself into the ground. Some experts recommend that you calculate your monthly repayments at a higher interest rate (about 2 to 3 per cent more than the average interest rate) to account for any future rate hikes. You’re most likely to be comfortable with a monthly repayment that matches your current rental costs. However, if your repayment amount considerably exceeds your current housing expenses, you might find it challenging to meet other necessary expenditures and reel under mortgage stress. It’s perhaps better to go for a smaller unit or rework your budget to buy an affordable property that you can enjoy stress-free.
As a first time home buyer, you want to be smart when it comes to buying. That means taking your time and getting expert advice.
It’s a good time to start thinking about your purchase and finding Perth’s best mortgage broker. There are a few other things that are equally important for you to consider. That’s why you need to keep the following four tips in mind, if you are a first time homebuyer.
Be Realistic and Know What You Can Afford
Everyone wants to live in the million-dollar mansion on the hill. The truth is that most of us will never be able to afford it. Instead, you need to sit down and look over your finances.
What can you comfortably afford each month for a house payment? This information is important because it will determine the size of the loan you can afford. That way when you sit down with a mortgage broker, you and your broker can work through the options. If for example you can only afford $1,500 each month for a house payment, you’ll want to ensure that your broker helps to connect you with a loan that is better suited to your needs.
Double Check Neighbourhoods and Statistics
We all want to trust the realtor we are working with. Unfortunately, many of them are interested in simply selling a house and moving on to the next client. Before you sit down to make an offer, look into the neighbourhood and gain a better understanding of everything. Look at Google maps to get a feel for the street and proximity to main roads, and Google the address for any news or sale information. You’ll also want to take the time to determine if house prices are on the rise in the neighbourhood or if you are buying the property at peak pricing.
Remember, this is the biggest investment of your life, you can afford to spend some time playing investigator.
Avoid Settling on Your Needs
Before you even hit the real estate websites know what you want in a house. A need is something you simply won’t budge on. Keep in mind that as you view more properties and your eyes widen to feasibilities, as these may change slightly. That’s okay, but keep focused on what truly matters.
Write a list of deal breakers, the most obvious is likely the number of bedrooms. Other may be having an open kitchen, big bedrooms, en-suite, alfresco or having a garden. Some things are easy changes, like adding grass to an empty backyard space, while others, like adding in another bathroom, aren’t.
Keep Open and Honest Communication with Your Spouse
The first time home buying process is complicated and stressful. It is critical you use your spouse as part of your support system. It can help to calm your fears by logically talking things through. That way, you have some peace of mind and you are able to avoid surprises along the way.
Remember, buying your first home should be a fun and exciting time, but it is fraught with challenges. Make sure you surround yourself with support and don’t be afraid of opinions, but know that if it’s not your cup of tea don’t let others change that. If you’re not buying a property with a spouse then use a parent or close friend. They will keep you grounded and stop you making an emotional decision.
We work with first home owners everyday and have become very familiar with the anxieties, triumphs, challenges and excitements of first home ownership.
If you have any questions or are looking for free and independent advice contact us today.
Let’s start with the most common preconception of mortgage broking – you don’t pay a mortgage broker, the banks do by way of commission or brokers fees.
This plays into everyone’s desire of paying as little as possible. The Perthpropertymarket is turning in the favour of the buyer, with many renters slamming the door on their landlords and moving to home ownership – cue the Perthmortgagebrokers.
So let’s break it down; aside from costing you nothing, what else can a broker do for you?
1 – Get a better deal
Mortgage brokers are known for saving you on bank fees and capitalising on discounted interest rate periods and low interest rates, saving you thousands over the lifetime of a loan.
With a mortgage broker, Perth home buyers also end up getting the best rates possible. Lenders know that a good broker will bring them a stream of new clients, so they pass on better introductory interest rates and deals.
2 – Work around issues
If you’re struggling to get a loan then using a broker is your best chance of success. A broker organises mortgage finance for a living, thus knowing the ins and outs of receiving finance.
With a mortgage broker, you have the chance to get a yes from several different companies and to secure a monthly payment with an interest rate and features that work for you. If you go to the bank on your own, you’re going to get whatever they offer you and there is minimal leverage for the borrower. That often means you end up paying more than you would had you opted to work with the broker instead. In some cases, the rate they would quote the broker would be lower than what you would otherwise pay if you went with them directly. More importantly, the broker can help you to avoid many of the costs that are associated with closing the home loan.
3 – Personal connection
Taking the home ownership step, whether it’s a first home, new home or investment property, is a big event in everyone’s lives. A good broker will take your case seriously and personally.
It’s hard to find a mortgage broker that isn’t just about focused on getting you in and out of a transaction, but rather building a relationship, understanding your circumstance and delivering you suitable, sustainable and customised options.
At Loans My Way, myself (Michael) and the team pride ourselves at not just meeting, but exceeding your expectations.
With all the extra time and potential credit reporting issues you save by avoiding multiple home loan applications, you can spend more time on focusing on the perfect home and relaxing, knowing that you are going to end up with the best deal possible.
If you have any questions or think we can help you, please contact us today.
A reverse mortgage offers an excellent way to increase your income during retirement. With a reverse mortgage, you’re able to borrow against the equity in your home, yet you still retain ownership of your residence. One of the benefits is that you won’t need to make any payments like you would on a conventional mortgage, these are purely at your discretion. You can draw a small amount from the lender on a regular basis, which with a little consultation with Centrelink, will not impede on any of your current pension entitlements. You can also opt for monthly payments or a lump sum payment.
If you permanently move from your home, sell the property or pass away, the reverse mortgage has to be repaid, but all SEQUAL accredited reverse mortgages guarantee no negative equity and even of the mortgage exceeds the value of your home, you can still remain there for life.
When to Get a Reverse Mortgage?
When can a reverse mortgage benefit you? If you’re having a tough time affording a comfortable retirement, a reverse mortgage can be an excellent option. Your home is likely to be your largest personal asset, and your home may even be completely paid off. With a reverse mortgage, you can increase your income without increasing your monthly expenses, and you still get to stay in your own home.
The amount of money you’re eligible to receive will depend on several factors, including interest rates, your current age, and the home’s value. The older you are, the lower the greater the amount of equity you can access, plus, the more your home is worth, the more money you are eligible to receive.
Downsides to a Reverse Mortgage?
If you permanently move from the home, you will need to pay off the loan, which is another potential downside. While it may not sound like an issue right now, if you need full-time care at a senior facility, your loan would be due if you were out of the home for more than a year. Reverse mortgages also affect your estate by decreasing the equity in your home, leaving your heirs with less money. But by thoroughly exploring your options with a SEQUAL accredited broker, you can take significant steps to either minimise, or at least be aware of any potential pitfalls associated with a reverse mortgage.
Some Important Myths and Truths About a Reverse Mortgage
Before considering a reverse mortgage, it’s important to understand the truth about them. Unfortunately, there are many common myths surrounding these complex loans. Here’s a closer look at some common myths and the truth behind them.
Myth #1 – The Title to Your Home Goes to the Lender
Actually, you still own your home, since the reverse mortgage is just a mortgage against your home.
Myth #2 – Your Loan Could Be More Than the Property Value
You don’t need to worry about your heirs being left with a bill if you die or leave your home. This type of loan will never be more than the home’s appraised value at loan maturity, as long as there is a ‘No Negative Equity Guarantee’.
Myth #3 – If You Have a Current Mortgage You Can’t Get a Reverse Mortgage
Technically, this is true, but if you use the proceeds of the reversemortgage to pay off the existing mortgage at close, you still can get the reversemortgage if you meet the lenders criteria.
Myth #4 – You Could Be Evicted From Your Home
You are the one who chooses if and when you leave your home. Having a reversemortgage will never force you to leave your home, since it’s not due until you no longer call that home your primary residence.
The opportunities and negatives of a reversemortgage should now be a little clearer.
If you’re looking for some advice or looking into alternative finance options, contact us today for a chat and plan an approach to suit you.
