Buying a home with a tiny deposit brings risks of its own

First home buyers have fared well under the 2021/22 Federal Budget with 10,000 extra places allocated to the First Home Loan Deposit (New Homes) Scheme. This lets eligible first home buyers buy or build a newly constructed home with a deposit of just 5%. There’s no lenders mortgage insurance to pay as the Federal Government effectively guarantees 15% of the loan.

There’s a sweetener for single parents too. A new scheme – the Family Home Guarantee, opens the door for up to 10,000 single parents to build a new home or buy an existing place with a deposit of just 2%, conditional on meeting lenders’ borrowing criteria.

The Family Home Guarantee isn’t reserved for first home buyers. You can apply if you’ve previously owned a home. The main criteria is that you earn below $125,00 annually.

Both schemes seek to address the difficulty home buyers can face getting into a rapidly rising property market. That’s a good thing. However, it is important to consider the risks of buying with a very small deposit.

In the case of the Family Home Guarantee, buyers are looking at a down payment of just 2%. That doesn’t leave a lot of margin for error if events turn against you, which can happen if the property market enters a downturn, you lose your job, or you face a string of unexpected bills.

It’s also a fair bet that at some stage interest rates will rise. These days, housing affordability has declined to the point where the traditional 25-year home loan is no longer the norm. Instead, plenty of borrowers have a 30-year term. It’s a no brainer that over the next three decades rates will rise from today’s rock-bottom levels. In fact, rates are so low right now, they really have only one way to go – and that’s up.

Don’t get me wrong.  I am very keen to see the next generation of home buyers take their place on the property ladder. I also believe single parents, who can face particularly tough challenges, deserve the right to own their home and enjoy all the stability this entails.

But if you’re buying with a very small deposit, know what you will be up for in repayments. Be sure you are not stretching your finances to the absolute limit – particularly if rates rise, and consider how you would manage if your circumstances changed.  A home can be your best asset, but it can also become a source of serious stress if your situation takes a turn for the worse.