For many of the prospective homebuyers we talk to, the deposit is the biggest barrier to purchasing a property. These candidates know that they can meet the long-term requirements of the home loan but find it difficult to get on the property ladder having not been able to save the up-front deposit required. Fortunately, in some cases, it is possible to use your rent as a part of your deposit. However, you will still need to put up an amount of money. Here’s how it works.
How it Works
As anyone who has ever rented a property will know, paying rent every month can make it difficult to put extra money away. Once bills and other expenses have been factored out, there may simply be not enough left over each month making it difficult to purchase a property without a deposit.
However, there is an upside to this. By at least keeping up with your rent, you are demonstrating your ability to manage your money responsibly. If you can prove that you have a strong rental history, with no missed payments or accrued arrears, many lenders will take this into account when deciding whether or not to offer you a loan.
- If you can produce 12 months of perfect rental history proof, some lenders may allow you to borrow up to 97 per cent of the full purchase price of the property, including the Lenders Mortgage Insurance (LMI) amount.
- If you can produce six months of perfect rental history proof, you may be able to borrow up to 95 per cent of the full value.
- In some cases, a lender may offer you up to 95 per cent of the property value (including LMI) with just three months of rental history proof.
You will notice here that you cannot borrow any more than 97 per cent of the total property value. This means you will still need to find that additional 3 per cent so that your loan can be approved and you can go ahead with the purchase. As the median house price in Sydney at the end of 2019 was 1.1 million dollars, this 3 per cent can still be a significant amount of money.
Finding the Additional Capital
As long as you can prove that you are responsible and proactive when it comes to your rental history, the lender may be able to accept a number of different methods of making up the difference. These include:
- A gifted deposit from parents, along with a signed gift letter to formalise the process and to show that the gift is not refundable.
- Proof from your bank and employer showing irregular income, including frequent bonuses, commission payments, or dividends.
- Inheritance funds, along with a confirmation of the transaction signed by the executor of the estate.
- Income from the sale of an asset that is not a property, including motor vehicles, artwork, jewellery, or other assets, along with reasonable proof.
- Capital from an ATO tax refund, along with the Notice of Assessment, which should include the amount of the tax refunded.
- A First Home Owners Grant (FHOG) from the state in which you want to make the purchase.
Read more: 6 ways to save for a deposit
There are a few details that you will need to consider before you try to use this method to secure a deposit:
- Usually, you will need to have been renting through a licensed real estate agent if your rental history is to be considered acceptable.
- Your name must be listed on the tenancy agreement. It is difficult to adequately prove your rental history if you were paying for someone else.
- If you were renting together with a partner, additional proof may be required.
If you have experienced frustrations like this, the news that your rental history can in fact help you secure a deposit will be very welcome indeed. However, given that this option incurs a very high level of leverage it must be handled with caution and care.