While purchasing your first home with a 20% deposit in hand is an advantage, for many first homebuyers, saving a deposit is not always possible. If you’re among this increasingly large group of homebuyers there are a number of options available to you:

Parental assistance in the form of gifts, loans or guarantees

Assistance from your parents can come in many forms and have a number of benefits. A gift towards your deposit will help reduce your repayments and even in the case of a loan or guarantee, the larger deposit or the offer of additional security for your loan may help you avoid the costs of Lenders mortgage insurance. There are a number of different options and products available from a range of lenders in this space. Your Loan Clinic broker will be able to discuss these with you in detail and help you identify the one that would best suit your circumstances.

Applying for a no deposit / Low deposit loan

Whilst the lending criteria are stricter for the products discussed below, if you have a good income and a credit history, some or all of the options below may be available to you. While there are additional costs involved, such as Lender’s mortgage insurance and in some instances higher rates, these products can enable you to get into the property market before property prices escalate beyond what you are able to afford.

Low Deposit Loans (90 to 97% loans)

This level of borrowing is usually fairly competitively priced and is available for a wide variety of loans. Your eligibility will depend on your income and you will need to pay Lender’s Mortgage Insurance (LMI) which some lenders will allow you to finance as an addition to the loan amount.

You will need to have funds available to cover the costs of the purchase in addition to the relevant deposit. If you are eligible, some of these funds may come from the First Home Owner’s Grant.

No deposit Loans (100% loans)

These loans have stricter approval criteria and a more limited range of options; you may not be eligible for introductory rates or be able to obtain some products for example Lines of credit etc. Lender’s Mortgage Insurance will apply. You will need to have funds available to cover the costs of the purchase. If you are eligible, some of these funds may come from the First Home Owner’s Grant.

No deposit plus costs loans (110% loans)

You will need to have a good income to qualify for this type of loan which is offered by some lenders. You may also be charged a higher interest rate. Lender’s Mortgage Insurance will apply. In most cases you will also need a guarantor or a second mortgage over another property.

Reduce credit card limits to what you require for day to day spending

Lenders will evaluate your borrowing power based on risk and your ability to repay all debt you have available to you. If your credit card limits are in excess of what you need, ask your Bank to reduce the limit. This will improve your borrowing power when you apply for a significant loan, like a mortgage.

Don’t make large consumer credit purchases when you’re looking for a home

If you’re planning on buying a home, try to avoid making purchases like furniture, appliances or a new car on credit or with personal loans. The repayments on these purchases will reduce your home loan borrowing power.

• Understand how much you can afford to borrow (based on what you are comfortable repaying as much as on what lenders are prepared to offer you). Your finance broker can assist you with this.
• Secure a home loan pre-approval, particularly if you intend buying on auction.
• Find a solicitor so that you are able to send through your contract for their review before signing
• Research the areas you are looking to buy in so that you are armed with a good knowledge of what homes are selling for and can make a reasonable market related offer.

The first homeowners grant is a federal Government grant of $7000 to assist homebuyers with the purchase of their first home.

There are a number of criteria that must be met in order to qualify for the grant, these include:

• The application must be made within 12 months of settlement or completion of construction
• You or a joint applicant must be Australian residents (requirements may vary from state to state)
• You must be buying in your personal name, not a company or trust
• None of the applicants must previously have held an interest in a property with a residence prior to 1 July 2000.
• Neither applicant may have owned and occupied a home after 1 July 2000
• Neither applicant may have applied for the grant previously
• The home must be located in Australia and must be occupied as your primary residence within 12 months of settlement or completion of construction
• The grant is limited to $ 7 000 per application (not per applicant)

Different lenders will apply different criteria to calculate how much they are willing to lend you based on your income, expenses and existing debt commitments. Working through your own budget at this stage to determine what repayments you can comfortably afford is a worthwhile and important exercise. Remember to leave some space in the budget for unwelcome surprises, like interest rate rises. If your budget is particularly tight, you may wish to discuss fixed interest rate loans or a blend of fixed and variable with your finance broker.

To get an indication of your borrowing power; click here to use the “Borrowing power calculator” supplied by the Mortgage and Finance Association of Australia (MFAA).

Honeymoon or introductory rate offers

These offers, usually 1% below the standard rate for a limited period of time are marketed to appeal to buyers who are particularly cost conscious. These loans often come with reduced flexibility and in some cases higher upfront, ongoing and exit fees which may be financed into the loan. These loans also tend to revert to the standard rate at the end of the special offer period.

You may well qualify for other types of loans that work out more economically for you over the short to medium term.

Flexibility

Be cautious sacrificing flexibility for rate (for example with honeymoon rates as above). Change or exit fees can be high if you are locked into a loan for a certain period and find yourself needing to refinance or sell the property during this time. You need to consider the total cost of the loan, not just the interest rate.

Mortgage fees and charges

Aside from the upfront fees like application and valuation fees, it’s important to understand the costs involved with other changes you may wish to make. Good questions to ask include:

• Can I make extra repayments without being charged?
• Can I access those extra repayments if I need to access them?
• Is the loan portable and what are the fees in transferring the mortgage if I sell this home and buy another?
• What will I be charged if I pay off the loan in full (for example due to sale of the property or refinancing)?

Get your solicitor to review the contract of sale before you sign it.

At a minimum, you should have the following clauses in the contract to protect yourself:

• A “Subject to finance approval clause” giving you time to raise finance / get your pre-approval confirmed for the particular property. Check with your broker how many business days you should allow here.
• A “Subject to Inspection clause” giving you time to have both building and pest inspections conducted.