Homeownership is often seen as the great Australian dream, although it's essential to ensure that you can make the monthly repayments without putting unnecessary strain on your finances. That said, there are several low-income home loan options to give home buyers access to the property market.
Who is Considered a Low-Income Earner in 2022?
While there's no specific definition for low income in Australia, the ATO's rules for tax offsets could provide some indication.
Eligible low and middle-income earners may get low-income tax offset (LITO) if their taxable income is lower than a certain income threshold, as follows:
- Taxable Incomes $37,500 or Lower: You are eligible for a maximum offset of $700.
- Taxable Incomes between $37,501 - $45,000: You qualify for $700 minus 5 cents for every $1 above $37,500.
- Taxable incomes between $45,001 - $66,667: You get $325 minus 1.5 cents for every $1 above $45,000.
In sum, if your annual earnings are $37,500 or less, it may be challenging to secure a home loan and make mortgage repayments.
How to Buy a House with Low-Income?
Planning and financial discipline can enhance your chances of loan approval.
We've outlined some key tips below.
Assess Your Borrowing Power
The first step is to assess your borrowing power. This will give you insights into how much you can afford to borrow and, ultimately, how much your loan repayments will be. That way, you can get in the best financial position to obtain a low-income home loan with a suitable interest rate for your needs.
You can use our online borrowing power calculator to estimate your borrowing power to scale the property ladder.
Set a Rigid Budget Limit
It can be easy to over-stretch your budget. So, setting a rigid budget limit before researching properties is essential.
While the mean price of residential dwellings was $921,500 per ABS reports, it can be lower as you move outside the capital cities to regional areas or beyond city boundaries. Finding something affordable in your budget improves your chances of getting loan approval.
At the same time, depending on your circumstances, you may have little flexibility about your choice of location. In that case, consider rentvesting, which can help you get into the property market sooner.
Save for a Sizeable Deposit
Typically your lender will also review your daily expenses to determine your eligibility when assessing your low-income home loan application. Therefore, it will be a big plus if you manage your daily expenses prudently.
Likewise, the lesser your liabilities or outgoing cash flow, the better placed you are to devote to home loan repayments. Lowering your debt and putting any extra money in your savings account will help you make a larger deposit.
Aim to save at least 20% of the purchase price. This will also help reduce your loan-to-value ratio (LVR), which lenders consider when assessing your low-income home loan application. In addition, your lender may even offer you a lower interest rate if you provide a larger deposit.
Another advantage of saving the required deposit is that you won't have to pay Lenders Mortgage Insurance (LMI). If you can avoid paying LMI, it will make the loan more affordable. Your lender will be more likely to approve your loan as they'll see you as a lower-risk borrower.
Ensure a Solid Credit History
Your credit report reflects your borrowing dependability. Even if you're a low-income earner, you can enhance your credit score by paying your credit cards, rent and other bills on time. Prioritise your expenditure and cancel cards you no longer use. This can also help improve your score.
Also, lowering your credit card limits will reflect well on your report. Likewise, debt consolidation can also be a good way to reduce the interest you're paying on your outstanding debts and improve your credit score.
Prove You Can Meet Loan Repayments
When applying for a home loan from a low-income earner or a self-employed individual, your lender will assess your serviceability or ability to repay your loan.
You can improve your serviceability by looking for low-income home loans with low-interest rates and flexible repayment options.
You should also clear your debts and loan obligations, reduce non-priority spending such as entertainment expenses, and increase your savings. This will help your lenders see that you're a responsible borrower.
Most importantly, when filling out a loan application, be honest about your financial circumstances and provide as much documentation as possible to support your case. Doing this will put you in a better position to meet eligibility requirements.
Low-income earners should consider applying for a co-owned or joint loan with their partner or a co-signer. By combining the income sources of two applicants, the ability to repay the loan improves significantly.
Notably, since the credit score of both applicants will be assessed, ensure that you both have good credit histories.
Also, before applying for a loan, you should seek advice and have a legal agreement stating how the owner-occupied property will be divided in an adverse scenario.
Types of Home Loans for Low-Income Earners
Though your borrowing capacity may not be the same as home buyers with a higher income, you can still enter the property market.
Guarantor Home Loans
If you cannot organise sufficient funds for a deposit, you could ask a family member to step in as a guarantor and help you secure a home loan. Having a guarantor may help you get a loan despite your low income.
Guarantor home loans are when an immediate family member, often a parent or a sibling, agrees to pay the loan amounts if you fail to make repayments.
When assessing your guarantor loan application, many lenders will want to know if your guarantor's financial situation allows them to help pay off your loan in case you cannot. Some lenders may also ask guarantors to leverage their properties' equity as security for your home loan.
The advantage of taking a guarantor home loan is that you can borrow up to 105% of your property's value. Home buyers often used this additional amount to pay stamp duty and application fees.
Notably, this option suits those with low incomes or first home buyers.
Low-Doc Home Loans
If you're self-employed, a freelancer, a casual worker, or have had low income in the last financial year, you could consider the low-doc home loan route.
Low-doc home loans are mortgages with lesser documentation than what is typically required for a standard home loan. It enables home buyers to borrow with much less or alternative paperwork and financial documents.
These days, only some lenders offer low-doc loans. They often require a larger deposit or charge a higher interest rate to cover the inherent risks.
Most low-doc loans have features such as redraw facilities, offset accounts, interest-only repayment and flexible interest rates. These offer peace of mind, enabling you to quickly clear your home loan repayments.
What Assistance is Available for Low-Income Earners?
In addition, the Australian Government has various assistance programmes, which you can benefit from, especially if you're a first home buyer and low-income earner. This gives you an entry point into the property market and helps you achieve your home ownership goals.
First Home Owners Grant
The First Home Owner Grant (FHOG) scheme was introduced on 1 July 2000. By offsetting the effect of the GST on home ownership, it assists first-home buyers in getting into a home sooner. The one-off grant payable to eligible first homeowners is administered under their respective legislations by the states and territories.
While undergoing revisions and differing across the states and territories, it can range from $10,000 to $30,000, depending on where you are. This home buyer grant is now primarily focused on new builds.
Our article on first home buyer grants in 2022 can get you up to speed with the grants and schemes available for first home buyers.
Home Guarantee Scheme
The Home Guarantee Scheme (HGS) is another initiative by the Australian Government to help eligible first-home buyers in cities and regional areas and eligible single parents having at least one dependent child to buy a home.
Notably, the guarantee scheme (now known as the First Home Loan Deposit Scheme) is neither a cash payment nor a home loan deposit. But, depending on the guarantee, you can buy a home with a deposit between 2-5% without paying Lenders Mortgage Insurance.
If you're a low-income earner, this scheme can be quite helpful as you'll only need to provide small amounts of savings for the deposit.
Government Housing Loans for Low-Income Earners
In addition to the grants and guarantees, low-income earners can apply for various special government schemes to help them buy a home.
Keystart, an initiative of the State Government, provides eligible West Australians with a chance to buy their own homes through an affordable low deposit home loan with lower entry costs, low deposit requirements and no LMI.
You can access full ownership and shared ownership home loans. In addition, home loan assistance is available for single parents trying to maintain the family home, people with disabilities and Aboriginal applicants.
Likewise, WA's shared home ownership helps you afford to buy your home with a loan through Keystart, the WA Government's home loan lender.
The Queensland Housing Finance Loan enables eligible Queenslanders to buy or build a house if they cannot get financing from a bank or lender. Eligible applicants should have a household income lower than $141,000 per annum.
You can access variable or fixed interest rates. In addition, the loan offers you a minimum deposit of 2% of the property purchase price, or the difference between the maximum loan amount you're eligible for and the property purchase price.
While there are no mortgage insurance fees or monthly account-keeping fees, you'll have to pay upfront costs such as application and mortgage registration fees.
South Australia's HomeStart Finance offers low-income home loans specifically catering to this group of homebuyers. You do not have to pay LMI and can enter the property market with as low as a 2% deposit, but upfront fees and other costs may be applicable.
The Victorian Government's shared equity scheme - the Homebuyer Fund - enables eligible homebuyers to own a home with a 5% deposit while receiving a contribution of up to a 25% of the purchase price. Aboriginal and Torres Strait Islander applicants require only a 3.5% deposit while eligible for a shared equity contribution 0f 35%.
The HomeBuild Access initiative enables eligible low and middle-income earners to access low-deposit home loan options to purchase new-built homes or build their own homes.
Through the MyHome Shared Equity Program, the State government helps you buy a home by sharing the upfront costs, thus reducing the deposit and the mortgage repayments. You have to pay a 2 % deposit.
Key Considerations Before Looking for a Home Loan
Before starting your look for a home loan, here are some key considerations to factor in:
- Financial Situation: Factor in your current income and other financial obligations to ensure you can afford the deposit and repayments.
- Credit History: Knowing your credit score in advance will help determine your loan options. It'll also help you understand if there are any issues to be addressed to improve your score.
- Speak to a Mortgage Broker: A mortgage broker can provide you with tailored advice to help you secure the best home loan for low-income earners.
How Joust Can Help Connect You with the Right Lender
Our Instant Match technology is ideal for low-income earners looking to secure a home loan in Australia.
Enter a few simple details, and the online tool will quickly assess your financial situation. Then, you'll be matched with the three most suitable lenders who will contact you with a tailored loan offer.
Note: The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.