Despite rising rates and cost-of-living pressures, the lack of housing stock has caused house prices to surge once again, adding more pressure to individuals aspiring to enter the property market. However, brokers are taking the lead in helping borrowers navigate the formidable deposit challenges by finding suitable credit products that offer home loan options
The great Australian dream of home ownership may still be alive and well, but making the dream a reality can be difficult for many borrowers.
According to lenders mortgage insurance (LMI) provider Helia, almost nine in 10 first home buyers agree it is getting harder to save for a deposit (with that proportion having increased over the last few years as house prices have risen) and 60 per cent think saving for a deposit is the biggest barrier to buying a house.
This content is available exclusively to
The Adviser premium members.
Indeed, the rapid rise in house prices and rental costs has led to a deterioration in housing affordability, according to the latest ANZ CoreLogic Housing Affordability Report 2023. It recently revealed the time taken to save for a deposit reached 10.5 years in March 2023.
Waiting over a decade to save for a house is just not feasible for many borrowers. But, given the significant time required to save for a deposit and the resurgence in home values, borrowers are faced with the challenge of saving larger sums for a home loan deposit or facing larger interest rates.
Speaking to The Adviser, Joshua Trevitt at JT Home Loans, acknowledged that while many clients have the means and funds to purchase homes, their dollar “doesn’t go as far in 2023” as it did in 2021.
He noted that clients accustomed to lower buffers in previous years now face stricter assessments with higher buffers, reducing their purchasing power.
As such, serviceability constraints have also emerged as a major setback, making it difficult for borrowers to afford the debt they need to finance their desired properties.
It came as the Australian Prudential Regulation Authority (APRA) has maintained a 3 per cent serviceability buffer, resulting in loans being assessed on 8–9 per cent, on the back of a cash rate that has tipped 4 per cent, further limiting borrowers’ capacity to take on debt (see page 33 for more).
Mr Trevitt said people “literally” can’t buy at the level they want to anymore, which has led to lenders, including majors Westpac and the Commonwealth Bank of Australia (CBA), to introduce alternative serviceability rate assessments of 1 per cent for qualifying borrowers.
LMI to the rescue
More lenders have also been moving to decrease the amount of deposit that borrowers need to have without paying lenders mortgage insurance (LMI). Certain lenders even allow loan-value ratios (LVRs) as high as 95–98 per cent for owner-occupied purchases, resulting in a reduced deposit.
According to LMI provider Helia, the proportion of first home buyers who have been able to purchase a property with 20 per cent deposit has actually been falling, dropping from 43 per in 2021 to 29 per cent in 2022 while the share of those who purchased their property with a deposit of between 5 and 14 per cent has increased, as these borrowers took advantage of these offerings or turned to LMI to help them get into market.
In fact, one of the most common ways for borrowers to overcome the deposit hurdle is to take on LMI; with Helia’s First Home Buyer Report 2022 showing that LMI usage has increased to more than seven in 10 (71 per cent) among those without a 20 per cent deposit, up from over a third (36 per cent) three years ago.
Guarantor loans
There is also a growing trend of borrowers using guarantors for loans recently, Mr Trevitt said.
With a guarantor loan, borrowers can obtain a home loan without the typical 20 per cent deposit requirement and lenders mortgage insurance (LMI). The guarantor can choose to guarantee a portion of the loan, such as 20 per cent, instead of the entire amount.
“I would have done seven last year, so they are definitely a growing trend this year,” he said, adding that it can have a significant savings.
For instance, a 1 per cent saving on a $500,000 loan over three years could result in savings of $15,000 on the guarantor loan and approximately $20,000 in LMI, totalling $35,000.
However, when considering guarantor loans, it is crucial to ensure that the guarantor fully understands their responsibilities and this is where broker communication is key.
Mr Trevitt emphasised the importance of thorough communication to avoid any potential issues down the line, particularly if the guarantor is a family member.
In the unlikely event that a borrower cannot make mortgage repayments, the responsibility falls on the guarantor. If the guarantor also fails to pay the loan, the lender may take legal action to recover the outstanding debt.
Once the borrower repays the guaranteed portion of the loan, the guarantor can request to be released from their obligation.
“I try and ‘scare them out of it’ and the reason I say [that] is because you want to ensure they’re 100 per cent [certain],” Mr Trevitt said.
“But the one thing you can guarantee is if you’re paying more from the start, we’re going to help reduce the debt, which will be the only control factor you have in order to release the guarantee as quickly as possible.”
Government guarantees
It’s not just Family Guarantees that are available nowadays, though. The government has introduced a range of guarantee schemes over the past years to help, where it is guaranteeing up to 18 per cent of the deposit.
The government’s Home Guarantee schemes, including the First Home Guarantee, the Regional First Home Buyer Guarantee, and the Family Home Guarantee, enable eligible buyers to enter the property market with a minimum deposit of 5 per cent or 2 per cent for Family Guarantees, while avoiding the need for lenders mortgage insurance (LMI).
The government guarantees the remaining portion of the deposit.
To capitalise on the equity in their property and secure a better interest rate, Sandy Kelso, director at Kelso Finance Brokers, suggests getting the property revalued annually if clients choose this option.
And, in light of persistent serviceability constraints, qualifying for a government home guarantee scheme can be a significant advantage for many borrowers, according to Ms Kelso.
Ms Kelso said: “These really help clients into the market. Especially with banks like NAB who will offer you a rate as if you have a 20 per cent deposit, when you only have 5 per cent.
“Remember — you’re only a first home buyer once so I think it’s a must to take advantage of these schemes.”
While the First Home and Regional First Home Guarantees primarily focus on assisting first home buyers, the government has recently expanded eligibility criteria to include more individuals, such as permanent residents, cohabiting friends, and previous home owners, who aspire to own a home.
Ms Kelso acknowledges the schemes’ success but points out that the “only limitations” are the property cap and maximum qualifying income.
Property price caps vary based on the financial year and the property’s location. For example, eligible home buyers in regional Tasmania could access the First Home Guarantee or Family Home Guarantee for a property valued at $450,000. However, the same guarantee in Sydney could apply for a property valued at $900,000.
Jack Fouracre, broker at Organic Home Loans, acknowledged the benefits of the schemes but highlighted that the process of accessing the Home Guarantee schemes has become more challenging in the last financial year.
“I’m having a lot of conversations with people now that they just can’t proceed purely based on borrowing capacity,” Mr Fouracre said.
“Last year they ran out of spots quite quickly, [but] this financial year, they’ve got heaps of spots left.”
Deposit bonds
Another option to replace cash deposits is a deposit bond, allowing buyers to use it as a deposit (up to 10 per cent of the purchase price) instead of their own cash. The bond remains active until settlement when the full purchase price is paid, at which point the bond expires.
Ms Kelso highlighted their usefulness in bridging scenarios where equity is tied up in an existing property or in conjunction with the Home Guarantee scheme.
“I’ve seen buyers put as little as $5,000 down until settlement. Others have taken a small cash deposit and the rest in the deposit bond,” Ms Kelso said.
It’s important brokers help set customers’ expectations upfront, letting them know where the market is right now, Melanie Smith, an Aussie broker told The Adviser.
“Buying your forever home doesn’t have to be your first home. Maybe get into the market with something that fits now,” she said.
“Other ways are looking at rentvesting — buying an investment property now, while renting where you want to live. This opens up broader options as to where you can buy and build from there.
“For many of my customers, I have helped them build property portfolios over time, using this avenue.
“Lastly, one of my favourite sayings is, “If it’s too good to be true, then it probably is too good to be true!”
As the housing market continues to present challenges, brokers have emerged as key facilitators, assisting borrowers in hurdling over the deposit hurdles and passing the finished line into their dream home.
