With increasing cost of living pressures, prospective home buyers are struggling to save a 20 per cent deposit but don’t lose hope of achieving your dream of home ownership, there are alternative pathways you can consider.
Rent-to-own
A rent-to-own arrangement is when the prospective home buyer leases a property, with the intention of purchasing it at the end of the leasing agreement. This pathway to home ownership may mean you can avoid having to save a 20 per cent deposit, delay securing a home loan and set a pre-agreed upon property price that may end up cheaper than the current market value at the time of purchase.
Things to consider (before entering a rent-to-own agreement)
- If there is a downturn in the property market you may end up paying more than the current market value of the home, as you pre-arranged the price at the beginning of your lease agreement
- You don’t own the home until you make the purchase payment at the end of the leasing period
- You will still need to secure a home loan before making your final purchase payment n It is important to understand the rules regarding rent-to-own arrangements in your state or territory
Bank of Mum & Dad
The bank of Mum and Dad refers to the financial assistance a home buyer may receive from their parents. Your parents might like to help you by giving you part of your deposit or paying an LMI fee for you. If your parents are in a position to help you, this can be a good way to enter the property market sooner.
Things to consider
- This pathway is only available to you if your parents can afford to assist you.
- To avoid future strain on your relationship, be clear about whether their financial assistance is a generous gift or a loan you will need to repay.
Parental guarantee
Parental guarantee is when a lender allows you to use equity from your parents’ property to borrow money for your own home. This usually applies where you don’t have the 20 per cent deposit required to secure a home loan.
Things to consider
- Your parents’ home is being used as security to guarantee that you will continue to make your loan repayments. If you default on your repayments, your parents’ home is at risk
- You are entering a formal and legally binding agreement with your parents so you need to make sure this will not put strain on your relationship with them.
Co-ownership
Co-ownership is when two or more people buy a property together. You might like to share ownership with a partner, sibling, relative or friend. Co-owning a property generally means you only need to save your portion of the deposit and pay your portion of the loan repayments, making this a much more affordable option. This is a common pathway to home ownership for couples.
Things to consider
- You are entering into a legal relationship with your co-owner. Be sure you enter this arrangement with someone you can make fair decisions with
- Depending on how you structure the arrangement, you will generally only own a defined share of the property and the equity built from it, but you may still be liable to the lender for the entire debt, if a co-owner defaults on their loan repayment obligations
- You will need to make decisions with your co-owners as to the management of the property and the loan. Consider entering into a written agreement to set out how things will work.
Shared equity
Your state or territory may offer a shared equity scheme. This is where the state government pays a portion of the home’s purchase price in exchange for an equivalent interest in the property. In short, you co-own your home with the government. This scheme can make home ownership much more affordable and, depending on the terms of the scheme, you may not need to make payments (such as interest or rent) to the government in relation to its share in the property, while you are still eligible for the scheme.
Things to consider
- Like co-ownership, you only own a defined share of the property and the equity built from it
- Participation in the scheme is subject to eligibility criteria
- Offers differ by state or territory.
Government schemes
State and territory governments may offer help to first home buyers, such as first home owner grants or stamp duty exemptions. These schemes can help to make home ownership more affordable for first home buyers by covering some of the additional costs associated with buying a home.
Things to consider
- Schemes are subject to eligibility criteria
- Offers differ by state or territory
Lenders mortgage insurance
If you don’t have a 20 per cent deposit saved, a lender may consider you higher risk to lend to. To reduce this risk, they may take out Lenders Mortgage Insurance (LMI) in respect of your loan. LMI is an insurance policy your lender takes out to cover them in case you default on your loan and they can’t recover the full amount owed, through sale of the property. They usually pass the cost of LMI onto the home buyer as a fee.
If a lender can access LMI, they may be willing to lend to you even if you don’t have the full 20 per cent deposit (plus other upfront costs such as stamp duty) that is usually required to be approved for a home loan. If you can service a home loan but saving a 20 per cent deposit is a barrier to home ownership for you, LMI might be an option.
Monthly Premium LMI is when you pay the LMI fee monthly instead of paying it upfront or capitalising it into your loan. This option means your LMI fee is not included in the loan amount so you won’t pay interest on it, and you can stop paying for LMI when your loan-to-value ratio (LVR) reduces to below the LVR determined by your lender, or until the loan is discharged.
You may have a family member who wants to help you enter the property market. LMI Family Assistance is when your family member pays your LMI fee upfront instead of you paying monthly or capitalising it into your loan. Helia’s Family Assistance offering provides home buyers and families who want to support home ownership the flexibility to pay the cost of LMI upfront at the time of loan settlement and receive a 15% reduction in the fee.
Republished with permission from It’s My Home magazine, issue 9 (2023-24)