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Can you really secure a home with just a $10,000 deposit?

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By John Beveridge - 
Home deposit Australia Coposit OwnHome

One of the most urgent problems to emerge in the housing affordability crisis is the need to find an appropriate deposit to get to first base on the housing ladder.

With expensive and problematic lenders mortgage insurance generally required unless the borrowers have a 20% deposit and housing prices so high, the barriers to entry and time needed to save a deposit are quite steep.

Unsurprisingly, a number of new products have arisen to deal with this deposit gap, which can seem quite appealing, given that rising house prices can outstrip savings rates, making an earlier entry into the property market attractive.

Innovative deposit schemes

One such scheme that was recently launched by the Commonwealth Bank allows home buyers to initially pay just $10,000 as a deposit for off-the-plan homes – with the remainder secured by a property tech platform Coposit.

It is designed to make it easier for first home buyers to break into the housing market and also helps developers get the financing they need to start building.

That second point is very important because off-the-plan projects have really struggled to get off the ground recently as lenders avoid first home buyer projects to focus on smaller, luxury developments with bigger profit margins.

That is perhaps a natural consequence of higher land prices and skyrocketing construction costs but has resulted in some first home buyers having their deposit locked up in projects that have stalled or been delayed.

Weekly repayments as building starts

With a smaller deposit of $10,000, that is much less of a problem and according to the Commonwealth Bank, the scheme should help to rid projects of delays caused by getting construction finance.

Developers can include the low deposit sales in their pre-sale hurdles to get projects off the ground and begin building.

Naturally there are limitations with this scheme only working with developers who have signed up to the Coposit platform, which currently operates in Queensland, NSW and Victoria with plans to expand to other states.

Also, after customers pay the initial amount which can be as low as $10,000, they then have to make weekly repayments during the building and development process until they reach a 10% deposit.

There are no interest costs because the developers pay a fee to join the Coposit platform but there is no such thing as a free lunch, with those developer fees undoubtedly baked into the final cost of the property.

Can you borrow your deposit?

If for any reason a home buyer can’t make the payments needed to reach a 10% deposit, the developer can then either put the property back on the market or decide on a delayed payment structure.

Another limitation is that the scheme only works with new developments, so it will only address the issues for a select group of buyers who want homes in certain areas.

Another scheme that is potentially more flexible allows homebuyers to effectively borrow the deposit.

Deposit loan lender OwnHome works best for buyers who don’t have a large deposit but have strong cash flow and a good credit history with the ability to get a standard 80% home loan.

As a non-bank lender, Ownhome can act quickly, with buyers needing to be confident that it is better to get into the market quickly rather than waiting around while prices change and they are saving a deposit.

Are two loans better than one?

The cost, of course, is that the home buyer has two loans – the deposit loan and the housing loan – and it would be in their interests to reduce those loans as fast as possible.

Deposits can be as small as 5% and there is no lenders Mortgage Insurance but OwnHome provides the remainder of the deposit and arranges the home loan for the remaining 80%.

The OwnHome deposit loan has a term of 15 years and the company charges an upfront service fee to cover costs such as the compulsory use of an OwnHome buyer’s agent, conveyancing and property reports.

Extra fees to pay

Those service fees vary depending on the size of the deposit provided, ranging from 2.2% of the purchase price for those borrowing the full 20% down to 1.1% for buyers who borrow only 10%.

The variable deposit loan has a high interest rate of around 13% but comes with the ability to defer some interest until the property is sold.

Naturally, homebuyers also need to pay for stamp duty, so the total extra amount can be quite significant, however those extra costs have to be balanced against the opportunity cost and uncertainty of waiting longer before buying.

That is effectively a judgement call.

Should property prices continue to rise at the same rate they have been, then getting a loan for the deposit could leave you ahead.

However, if property prices flatten or fall, the added expense of getting in early is going to leave you with less money.

Of course, predicting future property prices is something of a national sport but remember, a prediction is just that and nobody gets them all right.