8 ways into the property market with a small deposit

The Australian property market boomed amid the pandemic, with prices reaching record highs thanks to high demand, low supply, and low-interest rates.

While the market has cooled since then high prices and rising interest rates mean it’s still as difficult as ever for first-home buyers to get into the market.

Couple this with today’s rising cost of living including rents at record highs and with low vacancy rates across all cities, and this means first-home buyers’ savings goals are being stalled even further.

Now, first-home buyers saving for an entry-level house for a couple aged 25-34 will take 11 months longer annually across capital cities, taking the average time to save up to 5 years and 8 months, according to Domain’s latest First Home Buyers report.

Time to save for entry units has also risen by 3 months, taking 3 years and 6 months.

But there is some good news – there are a few alternatives to fast-track your way onto the ladder.

So if you’re not willing to wait, Domain has put together a list of 8 ways to get onto the property ladder for the first time without a 20% deposit.

1. Lenders mortgage insurance

Lenders’ mortgage insurance (LMI) is a one-off, non-refundable, non-transferrable premium that’s added to the home loan balance which compensates lenders or investors for losses due in the event of a mortgage loan default.

It’s required by Australian Banks, borrowers who have less than a 20% deposit of the property purchase price are charged LMI by finance lenders.

The LMI premium is arranged by the lender, not the borrower, but is payable by the borrower and is calculated on a percentage of the purchase price.

Given it’s calculated on the size of the deposit you’ve managed to save, the smaller your deposit, the more costly your LMI.

2. Home guarantee scheme

The home guarantee scheme is a federal government program to help first-home buyers enter the market sooner.

In its current form, the scheme allows eligible borrowers to take out a mortgage with a deposit as small as 5%, without paying lenders’ mortgage insurance.

This is done by the government by guaranteeing up to 15% of the loan.

Applications are limited to singles with an income of up to $125,000, or couples with $200,000.

Purchases under the scheme are limited to between $350,000 in some regions, to up to $950,000 in Sydney for new homes.

3. First home super saver scheme

First home super saver scheme, introduced by the Australian Government in the 2017–18 Federal Budget, supports first home buyers who meet the eligibility criteria to save money for a house deposit using their superannuation fund.

You can benefit from this by both the tax concessions on superannuation and on being able to take out up $15,000 of your voluntary super contributions from any one year – and up to a recently increased all-time total of $50,000.

The catch is you need to apply to the federal government for permission before you buy your home.

It’s also worth remembering that using this scheme will diminish your future super savings.

4. First homeowners grant

The first homeowner grant scheme, introduced nationally on 1 July 2000, is funded by the state and territory governments and administered under their legislation.

A one-off grant is payable to low–income first homeowners who apply and satisfy eligibility criteria.

Examples are that at least one applicant must be a permanent resident or Australian citizen, each applicant must be at least 18 years of age, and temporary residents do not qualify to receive the grant.

In NSW, applicants can receive $10,000 for a new home priced up to $600,000, or up to $750,000 if you’re building it yourself, and are exempt from paying stamp duty on homes up to various values.

In Victoria, applicants can also get a $10,000 grant for a new home but valued up to $750,000, and $20,000 for those in regional Victoria, also with stamp duty exemptions.

In Queensland, the grant is $15,000 for a new home similarly valued up to $750,000. Again, there are stamp duty exemptions.

5. Guarantor loan

A guarantor loan works by someone else providing equity or security in their property to fund part, or the whole, deposit.

That guarantor is responsible for paying off the loan if you’re no longer able to meet your financial commitment.

By using a guarantor home loan, lenders are generally more flexible with their lending criteria, which means that prospective property buyers can usually access loans with LVRs in the 90 per cent range.

The main consideration with guarantor home loans is that they must be provided by someone who has a strong relationship with the buyer or buyers, which generally means immediate family members such as:

• Parents
• Siblings
• Grandparents
• Spouses
• De facto partners

6. Buying with a friend or relative

Going to the bank of mum and dad has long been an option for first-home buyers struggling to get a 20% deposit together.

But more and more buyers are also opting to add their savings to those of a friend in order to go half-and-half on a property.

One of the main issues with co-buying is not thinking through what will happen when one party wants to move out with their new boyfriend or girlfriend at some point in the future.

Or what will happen if one of the co-owners wants to buy another property.

So it’s important, before going down the path of co-ownership, to discuss what you both envisage happening in the future as your situations change.

7. Rentvesting

Essentially, the rent and investment strategy is to buy an investment property first (where you can afford to buy) and rent where you want to live (but probably can’t afford to).

It’s a tactic that overcomes financial obstacles and exorbitant property prices because you can buy in a location that fits your budget and then rent in a location that suits your lifestyle.

It works because even though you’re renting, the property you buy is an asset that’s growing in value (assuming you choose a smart location) and being (in part) paid off by your tenant.

Not only that, but you’re gaining equity that can launch you into other property purchases down the track, including (when the time is right) a home to call your own.

8. Low deposit schemes

Some developers are now looking at ways to make off-the-plan homes more affordable to first home buyers.

For example, Domain reported that Third.i have launched a “co-posits” scheme with investment firm CoPosit for its Dairy Farmers Towers project in Newcastle, NSW.

The scheme means buyers can purchase a property with $10,000 in savings, with the remainder of the deposit paid over weekly instalments until the apartment is ready.

If it proves popular, it’s likely more developers might introduce similar schemes to help first-home buyers purchase their properties.

In summary

With high prices, robust demand, and rising interest rates, stepping onto the property ladder for the first time might seem to be slipping further and further out of reach for many Australians.

And while there are options out there for first-time buyers to buy without the added pressure of saving a huge 20% deposit, there are plenty of risks involved.

Before going down the route of one of the many available government schemes on offer, make sure you speak to an expert such as the team members at Metropole to ensure your potential property purchase makes good investment sense.

About Belinda Botzolis
Belinda previously worked as a Property Valuer and senior property advisor with Herron Todd White, one of Australia’s largest national valuation firms. She now helps her clients grow, protect and pass on their wealth as a Senior Property Strategist at Metropole.