How to Buy a House in Australia with a 5 Percent Deposit

Understanding the 5 Percent Deposit Option

To buy a house with a 5 percent deposit, you typically need to secure a home loan that covers the remaining 95 percent of the property's value. This type of loan is commonly referred to as a high LVR (Loan-to-Value Ratio) loan. It's important to note that not all lenders offer loans with such a high LVR, and those that do may impose stricter lending criteria or higher interest rates.

Factors to Consider

1. Lenders Mortgage Insurance (LMI): When borrowing more than 80 percent of the property's value, Lenders Mortgage Insurance is usually required. LMI protects the lender if you default on your loan. This cost can be significant, sometimes amounting to thousands of dollars, and is often added to your loan balance.

2. Eligibility Criteria: Lenders will assess your financial situation more rigorously. This includes a thorough review of your income, expenses, and credit history. Be prepared to demonstrate a stable employment history and a strong credit score.

3. Property Type and Location: Some lenders may have restrictions on the types of properties or locations they are willing to finance with a 5 percent deposit, particularly in high-risk areas or for non-standard property types.

Practical Tips for Buying with a 5 Percent Deposit

Improve Your Borrowing Power

• Enhance Your Credit Score: Pay off outstanding debts and ensure your bills are paid on time to improve your credit score. A higher score increases your chances of loan approval and may result in better interest rates.

• Reduce Existing Debt: Lenders will evaluate your debt-to-income ratio. Reducing existing debts can enhance your borrowing capacity.

Save Diligently

• Open a High-Interest Savings Account: Maximise your savings through a high-interest account. This not only boosts your deposit but also demonstrates to lenders your ability to save consistently.

• Budget Wisely: Track your income and expenses closely. Implementing a realistic budget can help increase your deposit savings efficiently.

Common Mistakes to Avoid

• Overextending Financially: Ensure you’re not stretching your finances too thin. Calculate your budget for future mortgage repayments, accounting for potential interest rate rises.

• Ignoring Additional Costs: Apart from LMI, remember to factor in stamp duty, legal fees, and other associated costs. These can significantly impact your overall expenditure.

• Neglecting Pre-Approval: Obtain home loan pre-approval before house hunting. This gives you a clear understanding of your borrowing capacity and strengthens your position when making an offer.

How Esteb and Co Can Help

At Esteb and Co, we specialise in helping Australians navigate the complexities of buying a home with a low deposit. Our experienced mortgage brokers work closely with you to find the best loan options tailored to your circumstances. We provide guidance on improving your application, understanding LMI, and accessing government grants or schemes that may be available to first-time buyers.