The Pros and Cons of Low Deposit Loans
A low deposit home loan is exactly that – while normally you would need a minimum 20% deposit, with a low deposit home loan you only need to provide a deposit of between 5-15%. This type of loan is attractive to first time buyers, individuals who are earning a good income but haven’t saved much, or anyone with a family member who is prepared to be named as guarantors on the loan.
How to qualify for the loan
Lenders will see you as high risk, so it is particularly important to demonstrate that you have a good income and that you have been in your current place of employment for at least six months. It is also beneficial for your bank statement to reflect that you managed to save up to 5% of the property value within the last three months. This will demonstrate that you are financially capable of managing the loan. A good credit rating is also essential.
The number one benefit to a low deposit home loan is that it enables you to enter the property market sooner, taking the first step towards a solid property investment portfolio… assuming you can maintain the repayments.
Most low deposit loans will require borrowers to have a guarantor who is prepared to back the loan. When you have a guarantor, you are not required to pay Lenders’ Mortgage Insurance which can be expensive.
As you are a high-risk borrower, the lender is going to charge you higher interest on top of your already high repayments. This makes it difficult to reduce the principle of the loan. Therefore, it is essential to plan ahead financially, by calculating the maximum cost of each repayment and assess this against your income and other expenses to ensure you can manage the loan.
Some of the additional fees and charges might also hinder your ability to focus on paying off the loan. Ideally, you want to reduce the principle as quickly as possible to reduce the interest rate. However, the structure of the loan might include fees for making extra repayments. You should also look at the cost of the exit fees, if you prefer to switch to another mortgage once you have made some progress on paying off this loan.
If you have a guarantor, it is important to keep in mind that the guarantor is risking their own financial security to support you. If you cannot make the repayments, the lender will simply turn to your guarantor to cover the debt. This situation can put a great strain on valuable personal relationships as well as the financial damage.
Consider the alternative
Rather than going with the high risk of a low deposit loan, your other option is to wait another six months to a year, until you have a bigger deposit and more choice and flexibility in the type of loan you choose. While it delays your
debut as a home owner, it will save you a great deal of money and stress in the long term.
Talk to a mortgage broker about your options, and if you do choose a low deposit loan, make sure you have the ability to make additional repayments as much as possible so you can reduce your debt faster without wasting your money on fees and excessive interest. Your mortgage broker can help you assess the best options so you can buy your home sooner.