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How to purchase a home without a 20 per cent deposit

Saving for a home deposit is no easy task, and as property prices rise it’s not getting any easier.

A Finder analysis of CoreLogic data has found that homebuyers in almost every Australian capital city need to save at least $100,000 if they want to be able to purchase a median priced home with a 20 per cent deposit.

The only city that was the exception was Darwin, however even there a 20 per cent deposit equated to more than $95,000.

The hardest capital city to purchase in was of course Sydney where homebuyers need to save almost $200,000 to get a 20 per cent deposit together to purchase a median priced property.

Saving this amount of cash to be able to enter the home market is very challenging, and it can take homebuyers years and years to accomplish, in which time property prices might continue to climb.

But if you want to get into the market without having saved the full 20 per cent deposit, there are some options:

Pay LMI

The most obvious way to get into the property market without having saved up a full deposit is to take advantage of lenders mortgage insurance (LMI). This is a one-off premium added to your home loan that can allow you to get into the property market with a deposit of as little as 5 per cent.

A lot of people try to avoid LMI, and with good reasons, but it’s not all bad.

It’s true that it does add a substantial cost to buying a home which can add up to thousands, but it can also help you secure a property much quicker than you would have been able to otherwise.

In some cases you might even find that property prices climb so fast that LMI costs eventually become insignificant compared to the capital growth you have benefited from.

Utilise the First Home Loan Deposit Scheme

Of course if you’re a first-home buyer you might be able to pay a smaller deposit and avoid LMI by taking advantage of the Federal Government’s First Home Loan Deposit Scheme.

Those who take up the scheme can use a deposit of as little as 5 per cent, with the government backing the rest. It’s a great option for those struggling to save for a full 20 per cent deposit, however there are price caps and other restrictions that may limit what you can purchase.

There are also only so many places available in the scheme each year so you’ll want to be quick to take advantage of it. You can find out more at www.nhfic.gov.au/what-we-do/fhlds/.

Ask a guarantor

If you have a small deposit and really want to avoid LMI then you could ask your parents if they are willing to go guarantor on your loan.

A guarantor loan works by using the equity of the guarantor as extra security on your home loan, allowing you to avoid LMI.

The guarantor doesn’t need to make any repayments, however if you are unable to meet repayments then the lender will turn to them.

This could be a good option if you have trusting parents (or a friend or family member) who are willing to help you get onto the property ladder.

For further advice though it’s well worth having a chat to a lender or a trusted financial adviser.

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