How to get a home loan with only 5% deposit and be comfortable
It is no surprise that coming up with a 20 percent upfront deposit to buy any house can be a challenge even for the most steadfast of savers. That is why there are home loan programs that offer loans up to 95% of the value of the property. In most cases, lenders will only approve any residential loan above 80% of the value of the property if you buy a Lenders Mortgage Insurance (LMI).
This insurance is paid by you and it covers the lender in case you default on your home loan. Usually, the bank or lender pays the insurance (LMI) premium based on the value of the mortgage to the insurance provider during settlement on your behalf and this premium is then added to your loan amount. You will notice a slight increase in your monthly repayment.
However, you should be really careful before committing to such agreement simply because you are paying more than usual with the insurance fee added to your repayment. Also, you are paying interest on up to 95% of the borrowed amount. A slight increase in your interest rate can put you in financial hardship if not properly planned and consulted with your mortgage broker or loan officer.
1. Assess your profile and seek help from a mortgage broker
Buying a home is a serious undertaking, whether it’s your first purchase or not. Regardless, it’s important to carefully review your current financial resources and requirements before looking into any mortgage option. You have to carefully consider how your housing payment will fit into your budget. You need to know how much of your savings you can apply towards the upfront deposit without feeling strapped. These are the elements you can and you should control before rushing too far into the home buying process. A mortgage broker can assist you in this regard.
2. Consider all the options
Even if you have been led to believe that an LMI (Lenders Mortgage Insurance) will solve your problem if you have only 5% deposit saved remember that conventional wisdom may not agree with your individual goals. Sometimes it’s okay to save a little longer rather than rushing into property investment hoping to build equity from growth.
3. Consult with your tax professional
One of the biggest selling points for investment property financing is the tax-deductibility from negative gearing. Before you assume that you’ll gain that year-end benefit, consult with your tax advisor to get a better understanding of the rules and limitations of the mortgage financing you plan to put in place. In fact, this is a good idea no matter what mortgage program you’re contemplating.
Choosing the mortgage structure that is best for you, where less than a 20 percent deposit is requires an understanding of both your needs and the lender’s requirements. By keeping in mind the points above and asking questions of your mortgage and finance professionals as they develop, you can determine which is the best fit and provide a wonderful opportunity for home ownership with only as little as 5 percent upfront deposit.
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