You might be closer to buying a house than you think

You might be closer to buying a house than you think

Housing affordability is one of the key issues of this election, yet it’s actually becoming easier to enter the property market in much of Australia.

Of course, ‘easier’ doesn’t mean ‘easy’. It’s still tough to save a deposit.

But as new statistics from Domain show, house prices fell in Sydney, Melbourne, Brisbane, Perth and Canberra during the year to March.

If you live in those cities, and you want to enter the market with just a 5 per cent deposit, home ownership might be closer than you think.

A lot of borrowers don’t realise it’s possible to buy a home with such a small deposit – yet there are actually more than 75 lenders that allow home buyers to borrow up to 95 per cent of the value of their property, according to a RateCity comparison search.

Who offers 95% mortgages?

Australia’s 10 biggest home loan lenders allow borrowers to take out mortgages with as little as a 5% deposit. They are Commonwealth Bank, Westpac, NAB, ANZ, ING, Suncorp Bank, Bendigo & Adelaide Bank, Macquarie Bank, Bank of Queensland and ME Bank.

How much of a deposit you need in each capital city

Here’s how much you’d need to save if you wanted to put down a 5 per cent deposit and buy a house valued at your capital city’s median price:

City Median house price Prices trending… 5% deposit
Sydney $1,027,962 Down $51,398
Melbourne $809,468 Down $40,473
Brisbane $563,666 Down $28,183
Perth $529,997 Down $26,500
Adelaide $542,474 Up $27,124
Hobart $478,247 Up $23,912
Canberra $722,440 Down $36,122
Darwin $514,546 Up $25,727

Which other banks offer 95% home loans?

A wide range of other banks offer 95% mortgages, including Auswide Bank, Bank Australia, Bank of Melbourne, BankSA, Bankwest, Gateway Bank, Greater Bank, Heritage Bank, IMB Bank, MyState Bank, P&N Bank, Qudos Bank, St George Bank, Regional Australia Bank and Teachers Mutual Bank.

Here’s how much you’d need to save if you wanted to put down a 5 per cent deposit and buy a unit valued at your capital city’s median price:

City Median unit price Prices trending… 5% deposit
Sydney $696,935 Down $34,847
Melbourne $466,892 Down $23,345
Brisbane $372,852 Down $18,643
Perth $347,596 Down $17,380
Adelaide $312,459 Down $15,623
Hobart $363,418 Up $18,171
Canberra $426,719 Down $21,336
Darwin $313,462 Down $15,673

Which credit unions allow 5% deposits?

Various credit unions allow 5% deposits, including BCU, Community First Credit Union, Credit Union SA, CUA, Family First Credit Union, Horizon Credit Union, Illawarra Credit Union, Macquarie Credit Union, Northern Inland Credit Union, People’s Choice Credit Union, Queenslander Country Credit Union, Queenslanders Credit Union, Southern Cross Credit Union, Summerland Credit Union and Transport Mutual Credit Union.

But wait, there’s more (costs)

If you think that buying a property with just a 5 per cent deposit seems too good to be true – well, it kind of is.

That’s because you’ll have to pay some other costs as well.

First, your lender will almost certainly make you pay lender’s mortgage insurance (LMI), which usually applies when your deposit is less than 20 per cent. LMI is an insurance policy designed to protect the lender (not the borrower) in case the borrower defaults on the mortgage. If you’re a first home buyer, and you put down a 5 per cent deposit on a $500,000 property, you’ll have to pay an estimated $15,960 in LMI, according to Genworth.

Second, you might have to pay stamp duty. This is a state tax, so it varies from state to state. For example, a first home buyer who purchases a $500,000 house would be exempt from stamp duty in New South Wales, Victoria and Queensland, but would have to pay $21,330 in South Australia.

Third, you’ll have to pay for conveyancing, which will set you back about $1,500.

Finally, you might choose to get a building and pest report, which would cost about $1,000.

Which non-bank lenders allow 95% LVR home loans?

You can also get mortgages with a loan-to-value ratio of 95 per cent through non-bank lenders such as AFM, Aussie, Australian Financial, Freedom Lend, iMortgage, Kogan Money, Liberty, Mortgage House, Pepper Money, RAMS, Resi, Resimac, State Custodians, Virgin Money and Yellow Brick Road.

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Learn more about home loans

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

What is Lender's Mortgage Insurance (LMI)

Lender’s Mortgage Insurance (LMI) is an insurance policy, which protects your bank if you default on the loan (i.e. stop paying your loan). While the bank takes out the policy, you pay the premium. Generally you can ‘capitalise’ the premium – meaning that instead of paying it upfront in one hit, you roll it into the total amount you owe, and it becomes part of your regular mortgage repayments.

This additional cost is typically required when you have less than 20 per cent savings, or a loan with an LVR of 80 per cent or higher, and it can run into thousands of dollars. The policy is not transferrable, so if you sell and buy a new house with less than 20 per cent equity, then you’ll be required to foot the bill again, even if you borrow with the same lender.

Some lenders, such as the Commonwealth Bank, charge customers with a small deposit a Low Deposit Premium or LDP instead of LMI. The cost of the premium is included in your loan so you pay it off over time.

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Do the big four banks have guarantor home loans?

Yes, ANZ, Commonwealth Bank, NAB and Westpac all offer guarantor home loans. These mortgages are also offered by many other banks, credit unions and building societies.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.