It's a common question we get: how can I afford to invest in property without a 20% deposit? There are a few options that investors can explore.
1. Take advantage of a loan with LMI (Lender's Mortgage Insurance)
A number of banks and other lenders offer minimum deposit home loans with an LVR (loan-to-value ratio) of 95% if a borrower has stable employment history, a high credit rating and responsible repayment history.
Some of these loans come with an additional cost of LMI, which is an insurance policy that the borrower pays for to protect the lender in the event of default on the mortgage. The cost can be up to $10,000 for LMI but this can be offset by property price gains and rental income.
2. Asking someone to be guarantor for you
Another option is a to ask a family member to guarantee your mortgage. A guarantee is available for borrowers who are buying a property, either as an owner occupier or investor.
This allows you to avoid the costs of LMI and save money that can be used to pay off the mortgage. For this reason, it's the option we recommend. But we know that it isn't a realistic option for everyone.
3. Equity in a property you already own
Equity represents the difference between how much your property is now worth and how much you still owe on the home loan for that property. For almost all property owners, they have positive equity in their home.
If this is the case, you may be able to use some of the positive equity on that loan as a deposit towards buying another property.
4. Get a personal loan
A final option is to get additional funds by applying for a personal loan. One thing to note about this option is that the interest rate paid on the personal loan can be up to 10% higher than the interest rate on a mortgage. For this reason it should only be used in specific circumstances.
An example of one such circumstance is where a borrower has saved a deposit that is just shy of the 20% hurdle that most lenders set to get a mortgage without LMI. In this scenario, a borrower might have a deposit of 15% and could get a personal loan to 'fill' the remaining 5% needed. If the personal loan is cheaper than paying LMI then it should be considered.
After helping hundreds of investors find their ideal investment property, we have experience with each of the options above.
If you would like to find out more, call Shayne on 0408 000 420 or email shayne@propertyinvestmentcoaching.com.au to get started.
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