Home loan guide / Buying a home

Can't afford a deposit? Here are 3 other ways to get a foothold in the market

3 min read

By Tic:Toc

House prices may be declining throughout parts of the country, but the Great Australian Dream remains expensive, and for some buyers – unattainable altogether. We explore alternative ways to break in.

Despite the economic impact of COVID-19, house prices in most capital cities have only experienced a slight decline. Sydney house and unit prices in June 2020 were still 7% higher than June 2019, while Melbourne prices dipped by just 1% compared to the same time last year.

This means that for first home buyers hoping to crack the market, a sizable deposit is still required – especially in major capital cities. Government initiatives like the First Home Loan Deposit Scheme can provide a leg-up, but places are capped at 10,000 per financial year.

If you want to buy a home but can’t quite afford a 10 or 20% deposit, a less traditional purchasing strategy may be your best weapon. Below are three different approaches to getting a foothold in the market.

Ask a parent to go guarantor

Most lenders require a deposit worth 20% of the property’s overall value. Anything under this and you’ll typically need to fork out for lenders mortgage insurance (LMI), which can cost you more over the life of the loan (and each month!). This is where a guarantor can come in handy.

A guarantor provides additional security on a home loan if the buyer doesn’t meet the full deposit requirements. For instance, let’s say you’re buying a home worth $450,000 and you’ve saved a deposit of $45,000 – equivalent to 10% of the property’s value. A guarantor can offer the other 10% using the equity on their own property. This will give you the 20% security required to purchase the home while avoiding LMI.

Going guarantor on someone else’s property is a big financial responsibility. If the buyer is unable to afford their loan repayments down the track, their guarantor will be liable for any debt owed to the bank. For this reason, most lenders prefer that only close family members become guarantors.

At the moment, Tic:Toc doesn’t offer guarantor home loans.

Rentvesting

Love where you live but can’t afford to buy there? Why not rentvest? This is where buyers rent in the suburb they want to live and buy an investment property in a suburb they can afford. It can be a cost-effective way to gain a foothold in the market without making significant lifestyle changes.

As with any strategy, rentvesting comes with its own set of pros and cons. Buyers can receive tax benefits and build wealth from their investment property while living in their preferred neighbourhood.

On the other hand, they may be excluded from capital gains tax exemptions when selling if they rented out their property, rather than live in it themselves.

Property co-ownership

If you’re struggling to afford the cost of a deposit yourself, why not split it multiple ways with friends or family? This strategy is best for those planning to buy an investment property, rather than live in the home themselves.

Purchasing a home is a big commitment, so it’s important that you only enter into this type of arrangement with people you trust. Co-ownership can be attractive because it allows you to pool your finances and potentially purchase a more valuable property than you would have been able to afford on your own.

The downside is it can put a strain on relationships and put your money at risk. Make sure that each individual entering into the arrangement seeks independent legal advice, and get everything in writing.

Being unable to afford a big deposit can be disheartening as a buyer, but it doesn’t necessarily mean you’re priced out of the market. Non-traditional buying strategies may be the key, provided you’ve done your research and weighed up the pros and cons.

Still looking for ways to save? Read 7 ways to hack away at your home deposit savings goal.

Bessie Hassan is a money expert at Finder

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