Saving money for a deposit to buy investment property is a daunting task. Ask anyone with the experience of buying a home and they will tell you that when they purchased their first investment property, it felt like they were running after a speeding train. The more they saved, the more the property prices increased.
Today too, many investors miss the chance of getting their hands on an investment property because of not having the required deposit amount. In the current real estate market scenario, there are tighter lending regulations, wherein lenders require that you as investors should contribute a certain percentage towards the total required funds.
Most lenders would require investors to demonstrate 5-10% of genuine savings or some lenders require 20% deposit for investment loan. This is one of the reasons why most investors usually consult a mortgage broker while comparing all the available home loan options for them.
However, there are also ways of buying an investment property without having to save a large deposit. So, let us read on and find out how these low deposit home loans work how investors buy a property without saving a large deposit?
How low deposit home loans work
Low Deposit home loans are usually sought by first home buyers who have minimal or no savings at all or investment property buyers who want to reap the maximum benefits out of negative gearing.
When applying for a home loan people may be allowed to borrow up to 95% or even 97% of the purchase price of the investment property that they are planning to buy. However, in order to cover the lender’s risk, the lenders mortgage insurance (LMI) has to be paid, which can prove to be a costly affair.
Furthermore, property investors should remember the fact that LMI does not provide any kind of cover in the event of default, it only covers your financial institution. It is also possible that one might have to repay their home loan at a higher interest rate than if they saved a larger deposit for a basic or standard variable loan.
Let us go ahead and see how investors can purchase their investment property hassle-free without the need of paying any investments.
Guarantor loan
This loan is possible to obtain if your parents own a property in Australia. This way they can provide a limited guarantee, on your behalf, for your mortgage. However, do keep in mind that most banks do not approve a guarantor loan for an investment property and some do not accept the parents as guarantors if they providing their owner occupied home as a security(Guarantee). This is especially true if the parents are already retired or staying on their property.
Consulting a good mortgage broker can help you to know which banks can help in getting a low- deposit home loan.
Some of the main benefits of guarantor loans include:
- No savings are required
- The full purchase amount including the money needed for stamp duty or any other associated costs can be borrowed.
- No LMI is required!
- The guarantor loan option is beneficial for both investors and owner occupied buyers
- In many cases, the interest rates are exceptionally low.
Home equity
If you already own a property then you can refinance it and release equity and use the amount as a deposit for purchasing your investment property.
Different banks will have different valuers and opinions if you choose this option and so remember to keep your mortgage broker in the loop. A good mortgage broker will be able to order valuations up front so that you can refinance with the lender which has the best valuation to offer.
If you have sufficient amount of equity on your previous properties then you don’t need any savings at all. However, you must also remember that you must have a clear credit history for this option to go ahead.
Superannuation
People usually forget that they have thousand of dollars saved away in superannuation which can be unlocked for property investment under the right circumstances.
Depending on your situation you can also set up a self-managed super fund (SMSF), which could give way to opportunities to invest in properties without having to save for a deposit.
If you are considering to make an SMSF property investment, it is important to look for independent legal and financial advice. In this case, you can borrow up to 80% of the property’s value. The super fund covers the rest of the amount, essentially making it a no deposit home loan.
Gifts
There are cases when some lenders are ready to accept gifts from direct family members in place of genuine savings, as a contribution to the value of the home loan. If the gifts are in form of cash, then they must come from immediate family members and be qualified as not repayable.
Your mortgage brokers are the best people to guide you through the entire process also ensuring that these gifts meet the lenders’ criterion.
Over to You
Low Deposit investment loans ensure that you can get your long awaited investment property sooner and that too without having to waste more money.
Low deposit home loans come with the same features as other loan options such as redraw facilities and other additional repayments.
Lending standards today are very stringent and a Low-deposit loan is not easy to obtain. Your financial history will be closely examined. This is why you need to ensure that you can meet all the requirements for getting approved.
If you are self-employed or not on a high income, you may find it hard to get approval, but this will vary from lender to lender. So ensure to take the complete help from your mortgage broker to make the right decisions to make the most of your investment property.