Low and no deposit loans – real options

Low Deposit? What real options are there?

If you have no or a low deposit you may have been getting conflicting advice about your options. Part of the reason for this is that every bank or lender has a slightly different policy when it comes to the area of low deposit home loans.

Let’s Get Real

The first thing you need to do is start saving. There are many great reasons to do this but when it comes to securing finance we need to show strength. People who save more that then spend are a better risk in the eyes of a bank. Even in cases when you have a full deposit banks will ask how you accumulated it or they will want to make sure that you fit the genuine savings requirements.

These safeguards reduce the overall risk to the bank and although painful for consumers it is ultimately a good measure. The lower the risk means a stronger banking system.

Starting Now Matters

Even if you will not be contributing the deposit yourself starting to save now does matter. Why? Well not all application get approved and banks make each decision based on their own internal criteria. Savers are better even if they have only just started to save.

What About Debts?

Before you pay off a debt talk to a broker. The reason is simple yet important. A broker will do some simple calculations with you but they will do them through the eyes of the potential bank you want to apply with. All this means is that the broker can work out if you qualify for a loan with your existing liabilities. If so it may be better for you to use a larger deposit for your purchase and have a smaller home loan.

Are You Talking About LMI?

Yes. LMI and risk to the lender. The higher your deposit the greater the cushion for a bank should the worst happen. In Australia (unlike many countries) mortgages have low levels of default. Banks insure themselves against the risk of default buy taking our insurance that you pay. It is called lenders mortgage insurance or LMI. Any loan over 80% ( or in some cases 85% ) is subject to LMI.

In fact the real price of LMI is not the financial one. Even though LMI premiums can be significant (sometimes 5% of the purchase price added to your loan) the real cost can be delays in approval and the risk of decline.

Lenders have delegated authority the make a certain level of decision on behalf of the insurer but that decision still has to be done wearing the insurers hat so to speak. Or in other words when you are in “LMI Territory” it is a little hard to get approved.

Okay! So What Are My Options?

Don’t forget the first best advice is to start saving now. Regularly and a good amount. A broker can help you set a goal that is realistic and will help you when it is time to apply. After that there are options.

Family & Friends – Gifts.

If you are one of those individuals who have a good-paying job yet have little savings or a perhaps you are a recently married couple who want to buy your own house but have limited resources (deposit) right now due to the huge expense of getting married, then there’s good news for you. Realizing a wide variety of customer needs Home Loan Warehouse have several banks ( in fact all the banks that offer these loans) on their lending panel that offer a Family Pledge style facilities that make use of a guarantor. These allow you to purchase your own home through the help of your parents or another family member. Some lenders have relaxed the relationship restriction and will allow a guarantor that is not technically related to you. You broker will need to do a little more work on your behalf if this is the case.

This type of loan is targeted at homebuyers or investors who have the ability to pay yet lack sufficient funds to meet the costs and expenses associated with the purchase of a home or investment property. There are many good reasons that this might happen or this need arises. Every circumstance is different so just talk to us and we will work out the solution that is right for you.

What is Family Pledge?

Family Pledge or guarantor products enable individuals like you to buy your own home easily. Instead of a deposit a guarantee is given, known as the family pledge, from your family member. It is common for  grandparents, parents, siblings to act as guarantors. The guarantee is given along with security over another piece of property in the amount of the pledge.

That is, if you needed a $40,000 deposit but you do not have it right now the guarantor would offer a limited security over their property in that amount and not the whole loan amount. This let you borrow the whole amount or get a 100% home loan in effect.  Some lenders will let you also borrow stamp duty and the other fees associated with borrowing such as legal fees but it is important to note that the less you borrow the stronger your application looks to the bank. Or in other words the bank likes to see some savings behaviour or a history of paying down debts and meeting your regular commitments. They simply want to know that you are a good risk or no risk at all.

How does it work?

Under this facility, your family may use their own home equity as an additional security for the portion of your loan amount. As a result, your loan to value ratio (LVR) will be reduced, thereby saving you a significant amount of money since you no longer have to pay for LMI. LMI or lenders mortgage insurance is a one off fee charge to the customer that protects the bank. This fee getting bigger as the loan size increases and the percentage borrowed increases.

How is the Guarantor Released?

The guarantor can be released from the guarantee anytime during the loan term as long as the loan balance and LVR is reduced to a level where LMI is not required or you are capable of paying the LMI premium.

As a general rule, the property to be purchased will be the security for the loan along with a limited guarantee over the other security property. A registered second mortgage is used to set the facility up over the guarantors property.

NB: Note if your guarantor owns several properties the guarantee can be given over any of them as long as there is sufficient equity. The guarantor does not have to offer the property they live in as security.

The Guarantor Home Loan:

· Allows you to borrow up to 100% of the purchase price, plus stamp duty and legal fees

· Reduce or avoid the payment of LMI

How does it benefit your family?

· You nominate a specific amount the guarantee is limited to

· Can be released from the guarantee anytime within the loan term, subject to LVR standard credit policy

· In case of default of payment, no action will be taken against your family member unless the action against you has been unsuccessful.