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What if you Want to Buy, but Don’t Have the Deposit?

By Emelyn Hinrichs

According to the International Monetary Fund, Australia’s property market is the third most expensive in the world. So what is the Australian first time buyer supposed to do about that? Buy a house in Serbia? If you want to buy a house, you need to buy one near to where you work or close to friends and family. You might scrimp and save to get together enough money to buy into your target property type, only to find that during that time all the property in your area has gone up in value, meaning you still don’t have enough money. You don’t have to keep running after a moving target. There are a few secrets of the property trade that you can learn to win a footing on the property ladder.

The Rules of Engagement

There are two acronyms you need to know about in order to understand how to get a mortgage. These are LTI and LTV. It is these two abbreviations that cripple first time buyers. LTI means “loan to income.” That is how the banks decide how much money they are prepared to lend you for a house purchase. It expresses how many times your annual salary you can borrow. Usually the maximum LTI is 4.5, so if you earn $40,000 per year, you can get a mortgage for $180,000. LTV is the percentage of a property’s value that you can borrow against. Since the financial crisis of 2008 banks are reluctant to lend more than 90 per cent of a property’s value. Really, they don’t want to go above 70 per cent and they hike up the interest rates above that level. So, ideally, if you want to buy a house worth $200,000, you should ask a bank for a mortgage of $140,000, meaning you have to find $60,000 cash. If you are earning $40,000 a year gross, you have made the LTI requirements. Even if the bank will go to 90 per cent, you can make it. However, a 90 per cent mortgage would still need you to stump up $20,000 cash, and after tax, the rent you pay, utility bills, food, car payments and unexpected disasters, getting that kind of money together could take you years.

LTI Killer

Your salvation from the LTI and LTV pincer movement lies in alternative financing methods. Rent to own and shared ownership can ride to your rescue. With shared ownership a finance house, an institution, or a property developer co-owns the property with you. You do not have to share your house with anyone. For example, if you buy a 25 per cent stake in a shared ownership plan on a $200,000 house, you fill out all the mortgage forms based on a value of $50,000. So, with a 90 per cent mortgage, you only have to come up with $5,000. The government of Western Australia is particularly keen on helping first time buyers with this system. They offer financing from their own lender for shared ownership that only requires you to pay in 2 per cent, or $2,000.

Rent to Own

The rent to own scenario is particularly beneficial to first time buyers. With this you find the house you would love to own and enter into a lease agreement with the owner. You make a contract that states you will rent the property for a number of years and during that period you have an option to buy. These options usually fix the purchase price at the point of contract signing, so you have the price locked in and don’t get stuck chasing rising values. It is common practice with rent to own contracts that the rent paid up to the point of sale is deducted from the price of the property. Thus, you accumulate your deposit as you pay rent.

For the best service and advice, contact our in-house mortgage broker, Paul Hale, on 0420 674 552 or paul.hale@loanmarket.com.au

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