A $2,500 deposit can get you into property – but what’s the catch?
Paying just $2,500 to get into property seems like a good way to buy in faster, with little cash down, and it has been making headlines this week.
Unsurprisingly, the idea that you can put down just $2,500 on a property purchase had people interested.
High loan to value ratios (LVRs), in the high 90s, have been regularly seen. However, it’s not often that close-to 100% loans are offered without some other sort of security.
Victoria-located HomeFirst, with the tagline “Your first home builder”, are currently running a promotion that notes that $2,500 is all some eligible first home buyers may need to start getting into property ownership.
Of course, the “$2,500 deposit*” comes with a hefty asterisk.
This finance offer is available to eligible buyers receiving the first home owners grant.
The terms and conditions explains that you are essentially trying to make up the 5% deposit required - in part through the grant, and in part through a personal loan “which are applied to the land contract, build contract, government charges and lending costs”. The finance is arranged through Western Australia’s The Loan Company.
The idea is to get them into one of their house and land packages across Melbourne.
Their “No deposit? No worries” line is also shared with The Loan Company’s other strategic alliance partners, including HomeStart (located in the same building as The Loan Company), whose “No Deposit? No drama” line notes that they have access to “exclusive products which are going to help young Western Australian's into new homes with NO DEPOSIT required.”
The Loan Company notes that many lenders require significant upfront deposits, which can be tricky for those in the rental trap. Their site notes that as part of the BGC Group, if you build your home with a BGC Homebuilder, then you may be eligible for their BGC NewStart No Savings Home Loan, tailor made for first time buyers to “pay zero deposit for the house or land”.
This isn’t an entirely new concept.
In fact the Home Loan Experts already note a number of criteria that you need to be able to fulfill if you want to take out this kind of loan.
This includes:
- A high income to afford both repayments
- Little existing debt (car loans, high credit card balances, etc)
- A clear credit history
- Some savings to make up any shortfall
- A proven rental history (preferred)
Source: Home Loan Experts
They also note that some lenders of personal loans will not provide this to you if it’s for a home loan. And many lenders require genuine savings (although some accept rent repayment receipts as genuine savings), and so will not accept borrowed money as a deposit. This means that the number of lenders who match up well in this respect are thin on the ground, and you may not be able to get with your lender of choice or get the rate you’ve had your eye on.
Remember, personal loans have higher interest rates. Jumping onto Finder sees the lowest personal loan’s variable interest rate at 9.95%, with the majority around the 13% mark. No small figure, considering home loans are sitting around the 5% mark.
Situations in which this could make sense include those who are expecting to come into a lot of money, to then pay down their loans. However, it’s entirely individual dependent.
What this type of loan can possible do is take place of the increasingly popular ‘guarantor’ concept (where a parent or close relative provides security so that the new buyer can borrow more without having to pay lenders mortgage insurance, or LMI). Not everyone’s parents own property, or have enough equity to assist their children, and not all children want to rely on their parents for a loan.
See over page for what to do if you have little to no savings
If you have little to no savings at present, and perhaps don’t qualify or want to use the low deposit loan and personal loan combination, then you have a number of options that you can consider.
Here are five things to have on your radar.
Use a guarantor
As previously mentioned, parents can be a helpful option
Save for longer
It might not be what you want to here, but sometimes saving for longer can be the most prudent option. Here are 13 simple savings tips from Mark Bouris.
LMI
You may be able to get a high LVR loan with little savings as a result of LMI.
Joint Venture
You could consider buying in with a family member or friend, sharing the deposit or coming up with another arrangement if they have capital but are perhaps missing another part of the equation like serviceability.
Fractional investing
This type of property investing, which allows you to buy a ‘part’ or a ‘share’ of a property acts a little like shares but allows you to buy in as a group of investors.