Our guide to lowering the deposit on your first home

One of the most common questions first home buyers ask is, "Can you buy a house with no deposit?" 

The thing is the answer to that question is not simple because the answer is "yes" but kind of "no" as well.

That's because the lending landscape has changed over the past five years and at this moment in time, lenders are being more conservative.

But that doesn't mean that low deposit loans for first home buyers have disappeared altogether.

It just means that you need to get your financial ducks in a row before you approach a lender for finance.

Knowing the home loan preapproval process is crucial

It might be hard to believe today but there was a time not that long ago when you could buy a property with no deposit whatsoever.

In fact, you could sometimes borrow more than the purchase price – so 105 per cent – to cover costs as well.  

Back then, lenders were competing strongly for business, plus the property market and interest rates were generally quite stable.

Ever since the GFC, however, those types of loans are almost non-existent.

That said, there are still low deposit home loans for first home buyers on the market and the answer to the question, "How much money do you need for a house deposit" can vary widely depending on your individual circumstances.

The most popular one of these for first home buyers involves guarantors, which is where someone – usually your parents – offers up some of the equity in their home to help with the deposit.

If you're considering low deposit home loans for first home buyers, it's vital that you understand the preapproval process and how to get pre-approved for a home loan.

By sitting down with a professional mortgage broker, before you start looking for your first house, you may be able to apply for home loan preapproval so you can begin your property search with confidence.

A guarantor can help you overcome the deposit hurdle

Let's consider a scenario where a first home buyer has struggled to save enough of a deposit, which could be because prices are rising faster than they can save.

If the "bank of mum and dad" has come to the party, does that mean that they're buying a house with no deposit whatsoever?

No, it doesn't. 

Low deposit home loans for first home buyers require some deposit, which can be about five per cent of the purchase price if you're prepared to pay Lenders Mortgage Insurance (LMI).

Most of these loans also require the need for the borrower to still be able to prove some sort of savings capacity as a demonstration of their ability to meet commitments.

As a rule, these “genuine savings” need to be around 5% of the property purchase price.

But the balance to complete the purchase must come from somewhere, which is often equity in your parent’s home which they use to guarantee the loan.

Over time, that percentage can be released when the property's value has gone up in value.

But a guarantor on a home loan is not something that should be undertaken lightly so make sure you access professional advice on this type of loan product.

It's important to understand, however, that even if you're getting a helping hand, you still need to prove to lenders that you have the ability to service the mortgage and that means having a savings history as well as a steady income.

The pros and cons of low deposit loans for home buyers

When it comes to low deposit home loans for first home buyers, one of the key benefits is that it can help first-timers into the market sooner. 

With property prices rising in our major capital cities, saving a deposit is the biggest hurdle that first home buyers have to overcome.

Like everything in life, though, there are some cons with these types of loans, because they are seen as riskier by lenders.

Some of the disadvantages of low deposit home loans for first home buyers include the limited number of products on the market, higher loan interest rates, LMI can be costly and guarantors also take a risk by becoming wholly and severally responsible for the loan as well.

However, as long as you understand all of the pros and cons, low deposit home loans can be a useful product for first home buyers who want to get into the market sooner rather later.

Structuring your finances to secure the best loans available

Before you buy your first property is the ideal time to ensure that your finances are in tip-top shape.

That way, you'll be more attractive to lenders and are likely to improve your chances of securing the best home loans.  

It's a good idea to sit down with a professional mortgage broker early so you can understand what your borrowing capacity is as well as the loan products best suited to your financial circumstances and your property hopes and dreams.

Strategies to consider if you're thinking of applying for a low deposit loan for first home buyers include having a clean credit history, which means always paying your bills on time.

If you have missed some at some stage, you should remedy these before you apply for your home loan.

Of course, you also must have proof of income, preferably from a steady job.

Who should I talk to for advice on my borrowing capacity?

The lending environment can be ever-changing which can make buying your first home seem more difficult than it needs to be.

But professional mortgage brokers stay on-top of everything that's going on as well as understand the best first home buyer loans on the market.

About Andrew Mirams Andrew is a leading finance specialist who holds a Diploma of Financial Planning (Financial Services). With over 32 years of experience in finance, Andrew has been acknowledged by the mortgage industry with multiple awards. Visit IntuitiveFinance.Com.Au