Finance: low deposit versus normal deposit - is there a catch?

Your grandpa and uncle tell you you need to save $30000 for a deposit, the ads say you need only $3000… No wonder you are confused! If you can get in a home with a deposit of only a few thousand dollars, why would anyone put in tens of thousands of their savings?

Well, what your grandparents might have never heard off is low deposit lending (ie Keystart). It’s a product designed to get people on lower incomes into their own home. And it can be a great option. Here's the short of it:

So the advantages are that you don’t have to save up nearly as much, because you only need to save 1% yourself. (Well.. Maybe you don’t. Read a blog about genuine savings here). Secondly, the fact that there is no Lenders Mortgage Insurance (read an article about that here) is not added to your mortgage, like the banks do, means that you’re not starting behind the eight ball. And thirdly, for people that are renting it can be nearly impossible to pay for the interest repayments during the construction period. In the beginning they are quite low as you only have the interest on the land to pay, but the more of your house is finished and the higher your mortgage gets, slowly it’s going to interest payments on almost your full mortgage, which can be hard to do if you’re still renting and have bills to pay. With Keystart you only need to pay $50 dollars per week of this interest, which makes it a lot easier.

So, is there a catch?

This seems all really too good to be true no? Well, there are a few things to remember:

1. You need to qualify for Low Deposit Lending. Besides that you - like with the banks - need to make enough money in your job to qualify for enough lending to get into a House and Land Package (you can read more about what factors come into play regarding what you qualify for here), you also can make too much money. As you remember me saying that Keystart is a product to help people on lower incomes into the market; you can also earn too much to qualify for this. In different regions you are allowed to make different amounts of money and it also depends on your family situation (single, couple, family?). (Read more about the Keystart limits here.)

2. One of the downsides of Low Deposit Lending is that it attracts a higher interest rate then the banks give you. Which means two things: 1. Your repayments on a given mortgage are higher - but you can read here why you’re not stuck with this mortgage for more then a year or a few years. and 2. The maximum amount of money they will lend you is generally lower then the banks too. Because after all mouths are fed, all repayments on other debts have been made, you can afford only a certain amount of mortgage repayments. The higher your interest rate, the lower the mortgage you can afford.

3. Remember how I told you you only need to pay $50/week in repayments during construction? Well, the interest that you owe above that has not disappeared; it goes on top of your mortgage. So it does pay to pay more then the $50 per week if you can.

So: Low Deposit Lending is the solution for a lot of people to get into the market. And that’s exactly what it is designed for. Getting in the market. Once you get into your property and it has grown enough in value, you can refinance the house to a bank. And that’s exactly what Keystart was designed for!

#finance #deposit #keystart