It’s a question that many prospective homebuyers are asking: should you buy now and embrace low interest rates? Or should you wait until you’ve saved up a larger deposit? There isn’t a one-size-fits-all answer to this question.
For many, buying sooner means that they’ll have to pay Lenders Mortgage Insurance (LMI), but it’s important to consider whether this extra cost is worth it for a lower interest rate. On the other hand, waiting until you’ve saved up more of a deposit will mean you avoid paying LMI, but may mean that interest rates have gone up while you’ve continued saving.
With the real estate market seeing properties selling way above their value, it’s an unusual time to be a home buyer. Since there are so many properties for sale, many buyers are coming across their dream homes. But is it a good idea to buy a home now, even if you haven’t saved up for a 20% deposit?
In this article, we’ll explain the pros and cons of buying a property now, while interest rates are low. We’ll compare this approach to waiting until you’ve saved up for a larger deposit.
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It’s no secret that houses in Australia are being listed and sold left, right and centre. This comes after marginal property value downturns in 2020, likely as a result of COVID-19 pandemic fears. It’s likely that many people avoided selling in 2020, when the full scope of the pandemic was largely unknown.
Confidence in the market is steadily being regained as the economy recovers and worries are being alleviated. With international travel off the agenda until further notice, more Aussies are able to focus on saving up deposits. Another appeal of buying now is to make the most of low interest rates. These historical figures won’t last forever, so buyers are wanting to make home loan savings while they can.
Most prospective home buyers are aware of the standard rules for securing a home loan. Typically, you save up a deposit of at least 20% if you want to avoid being hit with hefty LMI fees.
However, if your home loan application is competitive enough, you could still qualify for a home loan with a deposit as little as about 5%. Unless you are employed in certain select professions (e.g. accounting, law, medical), you will be charged LMI.
Getting home loan pre-approval can be a great way to understand the full capacity of your borrowing power before you formally apply for a mortgage. At Lendi, we’ve even introduced an easier way to understand how likely you are to be approved for a particular loan amount. Our Approval Confidence™ tool is a quick way to understand your realistic home loan options - no credit checks involved!
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Consider the following pros and cons of buying property now, with a lower deposit and while interest rates are low.
1. Lock in a current price
You get to own a home sooner and you are locking in its price now. The RBA has predicted that house prices will increase 30% over the next 3 years. So, if you want to buy a property in the next 3 years, you may be better off buying soon.
2. Make the most of a low interest rate
The low interest rates we’re seeing in 2021 won’t last forever, so it can be smart to work hard at paying down your mortgage while you have a low interest rate. Plus, you may be able to lock in a competitive fixed i rate for a few years that won’t be impacted by the likely interest rate increases.
3. Concessions available for new builds
If the house you purchase has been newly constructed and you are a first home buyer, you may be able to benefit from certain first home buyer schemes. Many of these schemes won’t be around forever, so it’s worth getting in soon.
1. Lenders Mortgage Insurance
Unless you’ve saved up a 20% minimum deposit, you’ll likely have to pay LMI. LMI can be expensive. On $1 million property with a $100,000 deposit (Loan to Value Ratio of 90%), you might need to pay LMI between about $19,000 and $27,500.
LMI can vary between lenders, so it’s important to do your research. Our Home Loan Specialists can advise you on lenders that charge lower LMI rates.
See how much you might need to pay if you're low on a deposit.
2. Might not get the most competitive rate
If you secure a loan with a high LVR, lenders may be less willing to offer a competitive interest rate. Having a higher deposit means that lenders view you as lower risk and may reward you with a lower interest rate.
3. Higher debt
If you buy now with a 5% deposit, you’ll be taking on a lot of debt. While interest rates may be low right now, they will rise eventually. You need to be sure you can afford an interest rate hike and ultimately avoid mortgage stress.
Waiting to buy once you’ve saved up a sufficient deposit can be seen as a very sensible approach to homeownership. But, there are some downsides to putting off buying until you’ve saved a 20% deposit. If property market values are increasing with no sign of slowing down, it may be smarter to buy now.
1. Not taking on as much debt
If you have saved up a larger deposit to buy a house, you will have a lower LVR and won’t be taking on as much debt. Your repayments will be lower and you’ll be in a better position when interest rates do rise.
2. No LMI = better interest rate
With a minimum 20% deposit, you’ll be able to skip paying Lenders Mortgage Insurance. Because of this, lenders will likely view you as a lower risk borrower and you have a better chance of qualifying for a lower interest rate. However, having low LVR doesn’t necessarily guarantee you a low interest rate. Lenders also take into account your credit score, income and financial habits.
1. Property values could rise
If property prices rise 30% in the next 3 years as the RBA has predicted, prospective homeowners who wait could end up being priced out of the market. After all, how helpful is a 20% deposit based on 2021 house prices when you’re buying in a more expensive 2023 property market?
2. Paying LMI now to lock in a deal can pay off
A lot can change in a very short period of time, so sometimes paying LMI (of say $15,000) can be worth it if the amount you’ll need to have saved to achieve a 20% deposit in 3 years time could be even further out of reach. LMI is usually far less than the value growth rate of a property, especially in such a hot market.
Yes, you can sometimes borrow up to 100% of a property’s purchase price without being charged LMI. To do this, you’ll need to get a guarantor home loan. In this case, a guarantor (usually a parent or close relative) will allow the equity held in their own property to be used as security for the borrower’s home loan.
In the event that the borrower is unable or unwilling to make mortgage repayments, the guarantor may be held liable to pay. A guarantor can be removed from the loan once LVR has reduced to be sufficiently inline with the bank’s lending policies.
Whether you opt to buy now, or in the future, Lendi can help you find a home loan with a competitive interest rate. Book an appointment with a Home Loan Specialist for free expert advice and find out what your home loan options are here.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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