The past few months have seen the property market heat up and in turn, so has the mortgage market.
This has resulted in many lenders loosening the strings and providing borrowers with low deposit or no deposit home loans.
Some lenders are even offering loans that cover over 100% of the property’s purchase price. Many buyers, particularly first home buyers, argue that they have no choice but to get a low or no-deposit loan due to the rise in property prices and cost of living.
Although these loans can help you buy your home sooner, having little to no money saved for a deposit could classify you as a high-risk borrower and therefore lenders may implement certain provisions in order to protect themselves in case you default. Some examples include:
• Borrowers may have to pay a higher interest rate
• Borrowers may have to pay additional fees and charges
• Borrowers will have to pay Lenders Mortgage Insurance which is a one-off fee that could equate to thousands of dollars.
Saving as much as you can before buying will not only either lower the amount of mortgage insurance you need to pay or remove it all together, it will also give you a wider variety of lenders and loans to choose from. Having a large deposit could mean you can actually choose which lender you want rather than be stuck with a lender that will take you. Saving for a deposit will also give you discipline required for making mortgage repayments in the future.
Before taking out a low doc home loan with little to no deposit, it is important that you consider what might happen down the track if your circumstances change. For example, if you become ill or lose your job, will you be able to afford the repayments? Will you be able to meet repayments if the interest rate increases by 2%?
Even though these low deposit home loans may help you purchase a property faster, a mortgage is a long term commitment and you will need to make sure you will be able to handle the repayments for the next 30 years.