How to buy a property when you don’t have a deposit

When buying property, most banks or lenders require a sizeable deposit plus costs before you purchase and settle. For someone starting off with little savings, you can still purchase property from understanding these three strategies. These strategies are guarantor financing, vendor finance and rent to own.

 

 

Guarantor Financing

 

A guarantor loan allows you to purchase a home using someone else’s property as security, which alleviates the need of needing a big deposit. Utilising your parent’s property can help you secure a property for yourself. You can enter the property market and start making growth in property equity, which overtime will make you closer to owning your home.

 

Pros:

  • Avoid lenders mortgage insurance
  • Get into the market sooner
  • Can remove your guarantor down the track

 

Cons:

  • Not meeting repayments can put your guarantors’ home at risk.
  • Having limited amount of lenders that will lend.
  • Restricted by lender choices

 

 

Vendor Finance

 

Vendor Finance is when a buyer and seller create a loan together. To break it down, instead of a buyer getting a bank loan and giving the seller that amount of money. The buyer gives the seller a deposit and has the seller loan the rest to them. Similarly, to  bank repayments, the buyer will then make repayments to the seller, as per their agreement.

 

Typically, buyers get into vendor finance agreements when they are not eligible to apply for a mortgage. After 5 to 10 years, the buyer should have improved their financial situation to be able to apply for a mortgage and pay a balloon payment to the seller. 

 

Pros:

  • Faster settlement as there is no need to wait for the bank to approve the application.
  • Cheaper settlement as there is no bank fees or appraisal costs.
  • Good alternative for buyers who aren’t able to secure a mortgage.

 

Cons:

  • Higher interest as the interest you pay to the seller is most likely higher than the banks.
  • Need approval by the seller, they may not want to be your lender.
  • Balloon payment is due after 5 to 10 years. There is a risk you could lose all the money you’ve paid so far and the house if you don’t pay this.

 

 

Rent to Own

 

Rent to Own is an agreement that gives the tenant the right to buy the property at the end of the rental period, at the price that is agreed upon prior to signing the agreement.

 

Pros:

  • You as the buyer have the right to buy the property at the end of the rental period.
  • The sale price is set in stone which benefits the buyer if there are any future house price spikes.
  • A great alternative for people who can’t get a loan in the short term but will be able to in the long term.

 

Cons:

  • A con for the buyer is if the market falls during the rental period.
  • You don’t own any part of the home until the final payment. You could potentially lose your deposit if you’re unable to settle on the property at the end of the agreement.
  • You need to apply for a home loan when the time comes for you to buy the property at the end of the rental agreement.

 

These strategies are great options you can use to purchase a property if you have little savings or aren’t eligible for a home loan. Each strategy allows you to get into the property market in the short-term. If you are looking for advice on purchasing a property, the team here at Silvertail are happy to work with you and help you find the best strategy.

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