How you can buy a house with a low income

William Jolly By on April 29, 2019
transactional
 
How you can buy a house with a low income

Photo by Andrew Tanglao on Unsplash

Think your income is too low to ever own a home? Think again! With a bit of discipline and care, you can be approved for a low income home loan. 

Much has been made of Australia’s ‘housing crisis’ lately, with recent data showing house prices have fallen significantly over the past year, particularly in Sydney and Melbourne.

Many reports have painted these house price falls as some kind of disaster for homeowners and investors.  

But from the perspective of most aspiring first home buyers, they are a good thing, while for those on low incomes, the reaction is likely to be “who cares?” After all, house prices still remain extremely high in most urban locations even after these declines. According to CoreLogic, the median house values as at March 2019 are as follows: 

CityAnnual changeMedian value
Sydney-10.9%$782,473
Melbourne-9.8%$624,425
Brisbane-1.3%$489,832
Adelaide0.8%$426,990
Perth-7.7%$442,716
Hobart6.0%$464,168
Darwin-6.8%$400,316
Canberra3.1%$595,212

Source: CoreLogic

This puts the national median house value in capital cities at just a smidge under $600,000, which would require a $120,000 deposit for borrowers targeting the oft-recommended 80% loan-to-value ratio (LVR). Saving up this amount can seem like an impossible task for those on low incomes. 

But it doesn’t have to be. With a bit of grit, discipline and nous, people on low or single incomes can buy a home in Australia. Because it doesn’t have to be as hard as the media makes it out to be. 

What is considered ‘low income’ in Australia? 

There’s no real definition for what’s considered a low income, at least not in Australia. But you could go off the ATO’s rules for tax offsets. It classes a taxable income of $37,000 or less as a low income eligible for a $445 tax offset, so if you earn less than this amount then you can probably consider yourself to be a low-income earner. This is considerably less than the nationwide median income of $53,000 a year, according to the Australian Bureau of Statistics. 

Obviously earning $37,000 or less in a year can present issues with buying a home in today’s property market. It doesn’t make it impossible, but it does make it harder.

How to get a mortgage on a low income 

It’s an absolute myth that lenders don’t lend to people on low incomes. There is no written rule saying “reject people who earn less than $XX,XXX per year” in the training manual of every lending specialist who works for a bank or lender. But it does mean they’ll likely take a closer look at your application and go through it with a fine-toothed comb, and can increase your chance of rejection for some of the top-tier home loan products. 

Some lenders have specific products tailored towards low-income earners or people on single incomes.

Low rate variable home loans

Company Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
3.15% 3.17% $1,718 More details
Purchase or Refi, P&I 80% Smart Home Loan 3.03% 3.05% $1,693 More details
Base Variable Rate Special P&I 3.35% 3.39% $1,762 More details
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
Low Rate Home Loan w/Offset
3.15% 3.17% $1,718
More details
Purchase or Refi, P&I 80% Smart Home Loan
3.03% 3.05% $1,693
More details
Base Variable Rate Special P&I
3.35% 3.39% $1,762
More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. *Rates correct as at 9th September 2019. View disclaimer.

1. Prove you can pay off the loan 

Serviceability is arguably the most important factor when a bank is deciding whether or not to accept your home loan application. Serviceability refers to your ability to ‘service’ (aka: repay) the loan. A standard home loan assessment will see the lender compare the expected monthly repayments against your disposable income. An inability to comfortably repay the mortgage based on the expected payments will likely see your application rejected. 

To help prove you’ll be able to pay off the loan and boost your chances of being accepted, you could do the following: 

  • Find a loan with a good low interest rate – this will make a huge difference to your repayments 
  • Find a home with a reasonable asking price
  • Clear all of your credit card debts and loan obligations
  • Clean up your outgoing expenses: that means stop buying so much UberEats, cut down on online shopping and stop using Afterpay
  • Demonstrate strong savings habits: having both a sizable savings deposit and high regular transfers to a savings account shows the bank that you’ll have something to fall back on in bad months, and that you’re good with money
  • Declare everything: don’t hide any of your nasty secrets from the bank. They’ll probably find out eventually and if they do you could be in trouble.

2. Get your credit score in order first 

Having a good credit score will massively increase your chances of getting approved for a good loan, as your credit score is a summary of your borrowing dependability. Based on the different credit agency used, the different credit score bands are as follows: 


EquifaxExperian Credit Simple (ilion)
Excellent833-1,200800-1,000800-1,000
Very good/Great726-832700-799700-799
Good622-725 625-699500-699
Average/Fair510-621550-624300-499
Below average/weak0-5090-5491-299

Ideally, you want to be sitting in at least the ‘good’ range – the average credit score in Australia is pretty rubbish so try to be better than that. 

Prior to applying for your home loan, you could try to improve your credit score over time by doing the following: 

  • Making credit card and mortgage repayments on time, consistently
  • Making bill and rent repayments on time (also consistently)
  • Paying off debts or consolidating them into a single loan or using a balance transfer 
  • Lowering your credit card’s limit
  • Not maxing out credit cards – keep your spending to 30% of your credit limit 
  • Not applying for too many cards and loans

3. Look within your means 

The median national house price in capital cities sits just under $600,000. But did you know this median value decreases significantly when you look beyond the capital cities to regional areas or even just beyond the city boundaries? 

We can expand on the table of value’s above to see how capital city prices compare to regional areas: 

Area Annual changeMedian value
Combined capitals-8.2%$597,860
Combined regional -2.1%$376,728
National -6.9%$524,149 

Source: CoreLogic

These regional areas also drag down the national median house value to near $525,000. In addition to being cheaper, regional areas are also recording higher annual growth, compared to the mostly negative figures seen in the capitals. 

According to property research hub Propertyology, these are the top 10 city council areas in Australia based on their median price growth:

RankStateCity CouncilMedian house price change – YE to Dec 2018 
1TASGlenorchy 16.4%
2NSWSnowy Monaro Regional 15.5%
3TASKingborough 15.1%
4VICBaw Baw15.1%
5VICMelton 14.4%
6TASClarence 14.0%
7VICBass Coast13.1%
8VICMacedon Ranges 13.0%
9VICMitchell 12.8%
10VICCampaspe 12.8%

Source: Propertyology.

Realestate.com.au data to March 2019 shows the median house price in the #1 placed Glenorchy, for example, is $380,000. A 20% deposit there would be equal to roughly $76,000. This is much more affordable compared to Hobart. 

Of course, not everyone can just uproot their lives and move to a regional area, and some may just plain not want to leave the city. But this goes to show that there’s value to be found beyond the capital cities. And besides, you can always rentvest

Bonus tips on how to buy a house with a low income

Here are some bonus strategies you could employ to fast track your way to owning a home. 

1. You can buy with a smaller deposit 

It’s generally recommended to build up a deposit of at least 20%, as doing so means you can avoid paying Lenders Mortgage Insurance (LMI). LMI is a cost tacked on by the lender to protect themselves against losses, which they deem as more likely if you don’t have a 20% deposit. The cost of LMI varies based on your house price and the loan-to-value ratio (LVR) you have. The Genworth LMI calculator shows the following LMI estimates: 

Estimated property value95% LVR90% LVR85% LVR
$200,000$5,073$2,718$1,479
$400,000$12,768$6,912$3,842
$600,000$25,707$13,176$6,630
$800,000$34,276$17,568$8,840
$1,000,000$42,845$22,050$11,135

Source: Genworth LMI premium estimator. Prices including GST but excluding stamp duty. Based on a loan term up to 30 years

So having a smaller deposit means you may have to pay thousands of dollars in LMI, so why on earth would this be a good thing? Well, there are a couple of reasons why you might still be happy with paying LMI:

  • Saving up for a 20% deposit takes time, and in that time the cost of property could increase by more than the cost of LMI.
  • In the time it takes you to save up the full 20% deposit, you might miss out on buying that one particular house you’ve always dreamed of buying that’s rarely on the market. If it’s your dream house that may never be for sale again, LMI might seem a small price to pay if that’s what it takes to secure the home.

Bear in mind that you might also have to cop a slightly higher interest rate with a lower deposit, but this isn’t always the case.

So if saving a 20% deposit is a bridge too far for you, then you could consider buying with less.

Variable home loans for low deposit

Company Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
Discount Variable 150k+ 95% 3.42% 3.44% $1,778 More details
Flexi First Option P&I 95% 3.43% 3.44% $1,780 More details
Accelerate Variable OO P&I 3.52% 3.57% $1,800 More details
Base Variable Rate P&I Special 3.55% 3.59% $1,807 More details
Real Deal P&I Special 95% 3.59% 3.63% $1,816 More details
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
Discount Variable 150k+ 95%
3.42% 3.44% $1,778
More details
Flexi First Option P&I 95%
3.43% 3.44% $1,780
More details
Accelerate Variable OO P&I
3.52% 3.57% $1,800
More details
Base Variable Rate P&I Special
3.55% 3.59% $1,807
More details
Real Deal P&I Special 95%
3.59% 3.63% $1,816
More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of 95% or over. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. *Rates correct as at 18 September 2019. View disclaimer.

2. You can use a guarantor 

It’s technically possible to get a 100% LVR (0% deposit) AND avoid paying LMI if you apply for a home loan with a guarantor – that’s someone (often a parent) who agrees to take responsibility for repaying the home loan if you fail to make the repayments. Guarantors use their own property as a security for the loan, which obviously represents a big risk for them. 

Not everyone has this option available to them, but they’re a popular option for those who do, especially if they have low incomes or are first home buyers. And speaking of first home buyers… 

3. You can use the first home owner’s grant 

At the moment first home buyers can get help from the government in saving for their deposit in the form of the First Home Owner Grants, which provide both a cash bonus and stamp duty concessions that vary based on the buyer’s state. First home buyers can get bonuses of up to $26,000 depending on whether they’re buying an established home or building a new one, which can make a real difference to saving for a house deposit

Read our article on the different First Home Owner Grants to see how much you and your partner could be eligible for. 

4. Look beyond the traditional banks for a loan 

Once you’ve got your deposit ready and you’ve cleaned up your finances, it’s time to get a home loan. It’s through your home loan where the biggest savings will be made – the right loan can save you tens if not hundreds of thousands in interest over the loan term. 

There are home loan rates as low as 3.44% for owner-occupiers at the moment (April 2019), which is very cheap, but not everyone can qualify for these rates. They sometimes have tighter restrictions on who’s eligible, which is one advantage the big banks have, as they’re more accepting of a broader range of people. 

But that doesn’t mean you shouldn’t try your luck with some of these lower rate home loans. If you’re in doubt speak to a mortgage broker who can find you a cheaper loan. 

Remember the additional costs of home ownership, and factor them in 

It’s crucial you remember these other costs besides just the deposit and loan repayments: 

  • Stamp duty on the house (use an online calculator to find out how much you pay) 
  • Transfer and registration fees 
  • Home loan fees (establishment fees, settlement fees, ongoing fees) 
  • Property valuation fees, conveyancing fees
  • Building and pest inspection fees, removalist fees and more.

These fees and payments aren’t talked about nearly as much as the deposit and loan repayments are, but they’re just as important, and can make or break your application since they can be thousands of dollars extra. 

Savings.com.au’s two cents 

Don’t give up on your dream of owning a home just because you consider yourself to be on a low income. The home buying process is a multi-faceted process with many different paths you can take, so there are options available for people of all incomes and situations. 

Try to follow these key points: 

  • Look beyond the areas within capital cities – there’s great value to be found elsewhere 
  • Temper your expectations and look for prices below the average 
  • Clean up your credit score and finances before applying – that means no more debts
  • Start a savings regime and stick to it – this will help your application 
  • Consider using a lower deposit, a guarantor, the first home owners grant or a combination of the three 
  • Do a thorough comparison of loan providers 

And remember, renting is often much cheaper than home ownership, so it can make sense to continue to rent, even if it’s not as ideal as owning. 


Disclaimers

*The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in 2018. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

Comparison rate includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. The interest rate per annum is based on a loan credit of $150,000 and a loan term of 25 years.

William Jolly
William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.
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