{"id":10386,"date":"2017-01-30T18:19:23","date_gmt":"2017-01-30T07:19:23","guid":{"rendered":"http:\/\/www.realestatetalk.com.au\/?p=10386"},"modified":"2017-01-30T18:19:23","modified_gmt":"2017-01-30T07:19:23","slug":"the-risks-of-low-deposit-home-loans","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/the-risks-of-low-deposit-home-loans\/","title":{"rendered":"The Risks of Low Deposit Home Loans – Andrew Miarms"},"content":{"rendered":"

It doesn’t seem that long ago when would-be homebuyers could take out 100 per cent loans \u2013 or even 105 per cent \u2013 to buy a property.
\nThe GFC mostly resulted in the end of such shenanigans but there are still low deposit home loans on the market today.
\nThe big question, of course, is whether this type of loan product is the right one for you?
\nSo, in this article we’ll attempt to answer that question as well as outline the pros and cons of low deposit home loans<\/strong>.<\/p>\n

So, what is a no deposit home loan?<\/h3>\n

A confusing aspect to no deposit home loans<\/a> is that the term “no deposit” doesn’t actually mean that you don’t need a deposit.
\nA no deposit home loan means that you can probably borrow up to 95 per cent of the purchase price, so in reality, it’s really a low deposit home loan.
\nSince the GFC, the number of lenders who still offer this type of loan has reduced, so it also can be tricky to track one down.<\/p>\n

Your guarantor\u2019s assets are on the line<\/h3>\n

\"So,
\nA low deposit home loan is made easier when someone else is prepared to offer up their own equity to shore up your risk profile.
\nOne of the most common facilities to use is a guarantor<\/a>, who is a person \u2013 usually parents, family or very close friends \u2013 who use all, or a slice, of their own equity as a guarantee to your home loan.
\nThe catch is, while they don’t have ownership rights<\/strong> to your property, they are also wholly and severally responsible for the home loan<\/strong>.
\nWhat that means is that if you can’t make your repayments, your guarantor will be responsible to meet your total mortgage commitments, even if their guarantee was only 20 or 30 per cent of the original purchase price.
\nIn today’s high property price environment in Sydney and Melbourne, guarantor loans can also be called “the Bank of Mum and Dad”, which are becoming more popular as prospective homeowners struggle to save the necessary deposit to get a foothold in the market.
\nBut it’s important that your guarantor not only\u00a0 goes into the deal with their eyes wide open and also with the necessary financial ability to make repayments if you cannot.<\/p>\n

But you\u2019ll have to take out Lenders Mortgage Insurance<\/h3>\n

\"LendersIf you’re lucky enough to secure a guarantor for your property loan for more than 20 per cent of the purchase price, then you won’t have to pay Lenders Mortgage Insurance (LMI)<\/strong>.
\nBut if you don’t have a financial angel at your table, and apply for a low deposit home loan, you will most likely have to also pay LMI.
\nIn Australia, LMI is required to be paid on home loans that have a loan-to-value ratio of less than 80\/20 when purchased.
\nSo, if you have a five or 10 per cent deposit<\/strong>, you’ll need to pay LMI<\/strong> based on the fact your deposit is less than 20 per cent of the purchase price.
\nThe cost of LMI<\/a> varies depending on the deposit and the loan amount, but generally speaking for a $500,000 loan with a five per cent deposit of $25,000, the LMI contribution will be about $15,723 extra.
\nBefore you have a small heart attack, though, you can capitalise (or add) this to the total loan amount, so your actual home loan would be about $490,723 with the LMI attached to it.<\/p>\n

And the interest rates are higher<\/h3>\n

Another disadvantage to low deposit home loans is the fact that they attract higher interest rates<\/a>.
\nThis is because borrowers utilising a low deposit home loan are seen as riskier by lenders because they don’t have the standard prerequisites usually required for loan approval.
\nSince the GFC, interest rates have been at historic lows, and while it doesn’t seem like rates will be rising quickly any time soon, they eventually will, which may result in some higher risk borrowers not being able to meet their mortgage repayments and even defaulting on their loans.<\/p>\n

So, should I wait and save a larger deposit?<\/h3>\n

Just because low deposit home loans are available it doesn’t necessarily mean it is the right product for you.
\nThe thing is, if you don’t have a 20 per cent or even a 10 per cent deposit, it ultimately reduces your borrowing power and can make it more difficult to find a lender prepared to approve your loan application.
\nOf course, with property prices moving, it is important to try to get into the market as soon as you can but that doesn’t mean you should consider loan products that attract a host of extra fees<\/a> and charges.
\nPerhaps, spending a bit longer saving a deposit \u2013 or receiving a gift of cash from your parents to help get you to that magical deposit number of 20 per cent \u2013 is a better option.
\nThat way you will be seen as more attractive to lenders and will likely have a favourable outcome<\/strong> to your loan application.<\/p>\n

<\/h3>\n

Article written by Andrew Mirams, Managing Director at Intuitive Finance\u00a0<\/b>
\n<\/b>Visit:\u00a0www.intuitivefinance.com.au<\/a><\/b>
\n 
\nThe information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.<\/em>
\n <\/p>\n","protected":false},"excerpt":{"rendered":"

It doesn’t seem that long ago when would-be homebuyers could take out 100 per cent loans \u2013 or even 105 per cent \u2013 to buy a property. The GFC mostly resulted in the end of such shenanigans but there are still low deposit home loans…<\/p>\n","protected":false},"author":176692471,"featured_media":10391,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[2,34,36,17],"tags":[70],"class_list":["post-10386","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-andrew-mirams","category-finance-topic","category-property-investment-topic","category-property-investment","tag-featured"],"yoast_head":"\nThe Risks of Low Deposit Home Loans - Andrew Miarms - Realty Talk<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/channels.realty.com.au\/realtytalk\/the-risks-of-low-deposit-home-loans\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Risks of Low Deposit Home Loans - Andrew Miarms - Realty Talk\" \/>\n<meta property=\"og:description\" content=\"It doesn’t seem that long ago when would-be homebuyers could take out 100 per cent loans \u2013 or even 105 per cent \u2013 to buy a property. 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