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Changes to minimum deposit requirements for properties in the Cairns region

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With more people struggling to save a 20% deposit in order to get on the property ladder, an increased amount of lenders are reducing their minimum deposit requirements. In the Cairns region it has always been easy to take out a low deposit loan when purchasing a house, but a current trend with a number of lenders is that purchasers looking to buy duplexes and apartments are now able to front up a mere 5% deposit (plus costs) to secure a loan on these types of properties.

What is a low deposit loan?

Low deposit loans (also known as high loan to value ratio loans), are loans of up to 100% of the property purchase price. Not all lenders will offer low deposit loans and in the past, not all property types have been eligible to be purchased with a low deposit loan.

Why have low deposit loans been difficult to obtain for apartments and duplexes?

If the borrower defaults on their loan the property will need to be sold for the lender to recoup their costs. There is always a risk that the market could drop between the time the loan is taken out and when a default occurs and if this happens, the funds owed could end up being higher than value of the property. In the past, only houses could be bought with low deposit loans because they were considered less volatile, but as the Cairns market has increasingly strengthened across all property types, lending against apartments and duplexes has become less risky.

What are the advantages of a low deposit loan?

The biggest advantage of paying a deposit of between 5 and 19% is that you can enter the market sooner. Depending on the rate at which you can save, it may take years to save a 20% deposit. Entering the market sooner will not only save you time, but it may also help you beat the market at times when housing prices are rising quicker than the average person can save. The sooner you get in to your own property the sooner you are paying off your own asset. Most potential home buyers will be renting before they buy, but by taking out a low deposit loan you can direct your hard-earned cash back into your own mortgage, not your landlord’s.

Are there any downsides to paying a lower deposit?

Unless you’re an eligible First Home Buyer you will usually need to pay Lenders Mortgage Insurance on a loan where the deposit is less than 20%. This type of insurance protects the lender in case you default on your loan. Depending on the lender you may have to pay this as an up-front cost or it could be spread across a portion of the loan term, for example, up to the point when you have paid down the loan to 80% of the value of the property. Higher interest rates typically apply to low deposit loans and lenders looking to borrow more than 80% of the property price will also be subject to harsher lending criteria and will usually need to be able to exhibit strong borrowing power to be approved.

What is the best way to be approved for a low deposit loan?

To be approved for a low deposit loan it will help if you:

  • have a strong credit history;
  • have a reliable and stable income;
  • have a genuine and consistent history of saving; and
  • have no or minimal debt.

It would also be prudent to engage the services of a mortgage broker who will know which lenders are offering low deposit loans and under what conditions. If you have a deposit of less than 20% and want to take out a low deposit loan, contact us to discuss your options.

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By Lauren Eakins

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