HOME LOANS

Why wait? Buy now with little deposit

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Despite reports that Australians are living in some of the largest homes in the world, new research shows the average Aussie can no longer afford to buy the average house.

That's because the average affordable home loan of around $330,000 falls well short of the median house with a half-a-million-dollar price tag.

To buy a home in Sydney you'll need a deposit of around $105,000 if you want to avoid lender's mortgage insurance (LMI), and that's not taking into account other upfront fees such as legal costs or stamp duty. Prospective home owners in Melbourne will need to save $93,000, while buyers in Brisbane will need to come up with $80,000 to achieve a 20 percent deposit of the median city house price.

If you want to have a $100,000 deposit within four years, you'd need to save around $450 per week in an online savings account paying 6 percent per annum. That's not easy, particularly if you're paying rent. So why wait to save up a deposit for your home loan when there are ways to buy with little or no deposit?

While there are no longer any lenders in Australia offering "no-deposit home loans", about 70 percent of mortgage products now enable home buyers to borrow up to 97 percent of the value of their future home, which is the highest "loan-to-value ratio" level recorded by RateCity since January 2009.

Damian Smith, chief executive of RateCity, said banks are offering loans to people who might not have qualified for them last year.

"[Institutions] are doing this because home lending remains very subdued, and they need to kick start the market to keep profits growing," he said.

But the luxury of borrowing sooner and with a smaller deposit carries some risks; you’re more likely to pay a large cost for LMI and you may not be eligible for the best mortgage deals as many lenders tier their interest rates and fees based on the deposit you've got.

A smaller deposit also makes you more vulnerable to rate rises, said Smith.

"Recent history gives us the reason why this is important. For example, imagine you took out a $300,000 loan in April 2009. You may have got a variable rate as low as 5.18 percent. By November 2010, that rate would probably have risen to 7.05 percent. That would have meant an extra $345 in monthly repayments, just 18 months after you took out the loan," he said.

"If you hadn't budgeted for that, you'd be joining the growing ranks of people who are falling behind on their mortgage repayments."

Even if rates don't increase, borrowers with a "repayment buffer" will be in a better position to increase repayments voluntarily. The impact of paying an extra $100 per month on your repayments is much bigger than you'd think, as RateCity's home loan calculator shows. On a $300,000 home loan at 7 percent, you'd potentially save up to $43,000 in interest and shave nearly three years off the life of your loan.