Ever wondered how people manage to buy a property with no money down? Here are three options that lenders will happily consider.
Australians who have lost hope of buying a home because of rocketing house prices are being offered new opportunities to keep the “Australian Dream” alive.
Home loan lenders are creating innovative products and tweaking old products to keep despairing home buyers in the market.
No Deposit
An increasing number of lenders are offering no deposit or 100% loans and many buyers are taking advantage of them.Research by Mortgage Insurer Genworth, estimates that in the four years to 2006 nearly 12% of first home buyers bought a house without a deposit.While the majority of customers have been first home buyers, individuals aiming to re-establish themselves after divorce are also using the product.
Lending criteria is slightly more stringent than for traditional loans especially when it comes to a borrower’s ability to make the monthly repayments. They must have been working for the same employer for at least 12 months and if not, then in the same industry for two years. A good credit history is also a requirement. Not all 100% loans are priced the same. Some lenders put a higher margin on their interest rates, but competition is forcing most to price their products at or near rates for traditional mortgages.
Adding to the cost of the loan is lenders mortgage insurance designed to protect the lender if things go wrong and the property has to be sold. On a loan of $350,000 the insurance can be as much as $10,000 which may be included in the loan amount.Instead of lenders mortgage insurance, some lenders may charge a slightly higher interest rate and others will charge a risk fee. In the latter case, the savings can be significant, but as always borrowers must shop around.
Shared Cost
A newcomer to the home loan scene; shared equity mortgages involve a third party taking a stake in a home consequently allowing borrowers to buy bigger and better or significantly reducing repayments.
For example, a lender puts up 80% of the cost the house, the borrower puts up 5% and an investment company puts up 15%.
The investment company’s contribution is not a loan, so you never make repayments on that amount. It gets a return when you sell by sharing in the capital gain taking 30% of your profit. If you make a loss the investment company will also wear some of the loss.To ensure losses are kept to a minimum these facilities are restricted to areas where reasonable capital growth has been demonstrated over a number of years.
Borrowers must also be able to demonstrate strong earnings and a good savings history.
Mum and Dad
Young buyers struggling to raise a deposit as well as meet the borrowing costs can look to mum and dad for support. Lenders will accept equity in the parents’ home as part security for a loan taken out by their children.In some instances, the kids can borrow up to 100% plus stamp duty and legal fees.
An advantage of using mum and dad as guarantors is that the new home owners do not require lenders mortgage insurance.Parents can also limit the amount of the guarantee and as soon as the kids have enough equity in their new home apply to have the guarantee released.The parents are not required to make payments on the loan and children must demonstrate an ability to service the full amount borrowed.
Lenders are promising more innovative products designed to make home ownership a reality are on the way, so those who have all but given up hope need not throw in the towel yet.
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