Help Is At Hand

If you’re buying your first property, there are lots of products and schemes that ease the way, starting with that all-important deposit

- Nicola Field

Interest rates may be at their lowest since the 1950s, but high property prices make climbing onto the first rung of the property ladder no easy feat. The good news is that help is at hand. The home loan industry, with state and federal governments, is pitching in with new products to give first home buyers a leg-up.

Meeting the deposit challenge

One of the biggest hurdles is saving a decent deposit. Low-deposit loans are available with a maximum loan to-value-ratio (LVR) – the amount you can borrow as a percentage of the property’s purchase price – of 95%. So it’s possible to buy a home with just a 5% deposit, though there are strings attached.

“Cracking into the housing market with a low deposit may seem tempting, and can absolutely be the key to getting your foot in the door sooner – but beware,” says James Symond, chief executive of Aussie home loans.

“If first home buyers have a high LVR they are likely to have higher mortgage repayments, plus also have to fork out for lenders mortgage insurance[LMI], which protects the lender and is an added cost to consider.”

LMI can be a major hurdle. It applies when you have less than a 20% deposit (meaning an LVR over 80%). The rub is that it doesn’t come cheap. If you buy a $500,000 home with a 10% deposit the LMI would cost around $8640. On a 5% deposit, it rises to about $15,960.

Some lenders will let you add the LMI premium to the loan balance (known as capitalizing LMI) so that it’s paid off gradually as part of the regular repayments. The catch is that this can push the amount you’re borrowing over the lender’s maximum LVR, potentially leaving you back at square one.

“Crunch the numbers,” advises Symond. “Is the cost of LMI worth getting into the market now, or are you better off waiting until you have a bigger deposit?”