Home Loan Deposit GapFunding Options

Deposit Gap Loan financing is a multibillion-dollar challenge in Australia

Over the last 20 years, Australian residential property has increased in value by 193%, while wages have increased by only 82%*

This has made it increasingly difficult for prospective home buyers to save for an adequate deposit.

Every year 100,000+ Australians buy their home without a full deposit and either rely on the Bank of Mum and Dad or incur the cost of Lenders Mortgage Insurance.

* source: CoreLogic

~$10 billion per annum
deposit funding gap

Current approach
Lenders Mortgage Insurance (LMI)

If a borrower has less than a 20% deposit, meaning the loan to value ratio (LVR) on a property purchase is above 80%, most lenders will require the borrower to pay LMI.

The purpose of LMI is to protect the lender (not the borrower) from financial loss if the borrower can’t afford to meet their home loan repayments.

By reducing the risk to the lender, LMI can allow banks and other financial institutions to lend larger amounts and approve more home loan applications that have an LVR greater than 80%.

LMI does not protect the borrower at all. In fact, any amount paid out by an insurer under an LMI policy becomes a new debt for the borrower and they can be pursued for this amount by the LMI provider.

If a lender requires the borrower to take out LMI, it is generally capitalized into the home loan, further increasing debt and repayments and reducing the borrower’s equity in their property.

LMI premiums are typically non-refundable or transferable, which means a borrower generally won’t be able to transfer the LMI policy to another lender, thus potentially locking them into a sub-optimal loan.

Avoid paying LMI
Investigate a Deposit Gap Loan from OSQO

A better way
OSQO’s Deposit Gap Loan

Eligibility
  • OSQO Capital will provide a Deposit Gap Loan (DGL) to approved applicants enabling them to achieve the minimum 20% deposit required to avoid Lenders Mortgage Insurance (LMI).
  • As well as meeting lending criteria, borrowers must have a minimum deposit of 5% (plus costs) to be eligible for a DGL.
Term
  • The DGL term is 30 years, comprising two periods:
    • Period 1: attracts interest only repayments for 10 years; and
    • Period 2: switches to principal and interest repayments for the balance of the 30 year term.
Interest rate
  • The interest rate payable will be variable - benchmarked to the borrower’s mortgage interest rate - and payable monthly in arrears.
Property Growth Interest
  • In return for the increased risk of the unsecured DGL during Period 1, Property Growth Interest (PGI) will accrue during Period 1 and be capitalised into the DGL principal outstanding at the commencement of Period 2.
  • Property Growth Interest will be calculated on the DGL amount, using the ‘CoreLogic Daily Home Value Index’ of the postcode in which a borrower’s property is located. In the event that there is no appreciation in residential property, PGI may not be payable.
Switching
  • Borrowers may request a switch from Period 1 to Period 2 as soon as a Loan to Value Ratio (LVR) of 80% or less is achieved (and by doing so, will avoid further accrual of PGI).
  • OSQO will assist by tracking LVR to identify the optimal time for a borrower to switch to Period 2.
  • At the end of the 10-year Period 1, the DGL will automatically switch to Period 2.
Additional Principal Repayments
  • Borrowers may repay their DGL in full (including accrued PGI) at any time in Period 1, however repayment within 2 years from settlement attracts an administration fee.
  • Additional principal repayments are not permitted in Period 1, they are however permitted in Period 2.
  • Borrowers may repay their DGL (which includes capitalised PGI) at any time in Period 2.
Security
  • OSQO Capital does not take security in Period 1, however a caveat will be registered at the commencement of Period 2 and OSQO Capital may also, at its discretion, register a 2nd ranking mortgage.
For an example of how a DGL works click here

A better way
Home buyers are better off with a DGL

Buying Your Home
Home Loan Lender & LMI
Home Loan Lender & DGL
Better off By

Purchase price

$850,000

$850,000

Stamp duty & buying costs

$52,020

$52,020

Home buyer savings

$98,000

$98,000

Home loan amount

$804,020

$680,000

Deposit gap loan amount (excl fees)

-

$124,020

Total primary borrowing

$804,020

$804,020

Lenders mortgage insurance (LMI)

$31,903

-

Deposit Gap Loan fees

-

$3,237

Total initial borrowing

$835,923

$807,257

$28,666 (retained equity)

Loan to value ratio (LVR)

98.34%

94.97%

Period 1
(DGL Interest only)

Home loan interest rate

5.29%

4.99%

0.30%

Deposit gap loan interest rate

-

4.99%

5-year Historic Growth Rate (CoreLogic) in property location

-

3.37%

Minimum monthly repayment

$4,637

$4,175

$461 per month

Switch to Period 2, or
Refinance at LVR <80%
(at 44 months)

Potential Property Growth Interest (PGI)

-

$16,445

Deposit Gap Loan Interest rate Period 2

-

5.19%

Minimum monthly repayment

$4,637

$4,486

$151 per month

After 30 years

Total cost of borrowing

$1,669,223

$1,601,297

$67,926 (Comparative Saving)

Inc. interest, buying costs, lender fees & LMI

Inc. interest, buying costs, lender fees & DGL fees

Find out if a Deposit Gap
Loan is right for you?

depositgaploans.com

Contact us

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