Three-in-five prospective first home buyers intend to buy soon with a smaller deposit, rather than wait until they have saved a 20% deposit. So how do they plan on doing so?
It usually takes between seven to 14 years for first home buyers to save a 20% first home deposit, according to a report by Genworth on recent and prospective first home buyers (FHBs).
With that in mind, it’s no wonder that 59% of prospective FHBs are exploring options to buy now rather than risk waiting until property prices rise.
Indeed, around two-thirds of recent and prospective FHBs believed property prices would stabilise or increase over the following 12 months.
So what options are available for prospective FHBs with a deposit of less than 20%?
Option 1: First Home Loan Deposit Scheme
The first option is the Federal Government’s First Home Loan Deposit Scheme, which three in four prospective FHBs intended to apply for.
Under the scheme, some first home buyers could borrow up to 95% of the property value without paying Lenders Mortgage Insurance (LMI).
However, with the scheme limited to a set number of loans each year, it’s important to understand all available first home buyer options and have a backup plan in place.
Option 2: Paying Lenders Mortgage Insurance
In recent times, one-in-three first home buyers chose to pay LMI to secure a home loan with less than a 20% deposit.
LMI generally costs between $3,000 and $13,000 depending on the size of the loan and your deposit amount.
It’s an insurance policy typically required when your deposit is below 20%. It protects the lender if repayments are not maintained and the property is sold for less than the remaining mortgage balance.
You can also use our mortgage calculator to better understand how deposit size and loan amounts may affect repayments.
Option 3: Bank of Mum and Dad
The third option, which was being considered by one-in-four prospective FHBs, is to seek help from the “Bank of Mum and Dad”.
Of recent FHBs using this approach, 28% received gifted funds, 21% borrowed funds from family and 16% used family guarantors.
Option 4: Off-the-plan
The fourth option, not covered in the Genworth report, is purchasing off-the-plan, which often requires only a 10% deposit to secure the property.
This can provide additional time to save before settlement while the property is being constructed.
That said, buying off the plan isn’t without risks, so make sure you research every aspect of the development carefully before committing.
Get in touch
If you’re a prospective first home buyer and want to understand your options for entering the market sooner rather than later, we’d love to help.
If you’re self-employed or have variable income, you may also want to explore self-employed home loan options.
We’d be happy to run through your options if you’re looking to buy with less than a 20% deposit. You can also book a free home loan health check or get in touch with our team.
