They say money talks, and when you’re earning more of the ‘folding stuff’ than the average punter, you can get a leg up on a higher bracket property, even when your savings habits may not be great.
A new fintech-backed product called Deposit Pro, launched by Australian firm Reaia, offers home buyers earning $250,000-plus or couples on $400,000-plus access to $2 million-$5 million properties who don’t have the cash to stump up with the typical 20% deposit.
Reaia identified a niche in the market after witnessing the difficulty many young and upwardly mobile professionals experience – some earning as much as $500,000 annually – buying properties where they want to live rather than where they can afford right now.
Reaia co-CEO Neil Smoli believes this growing cohort of high income yet cash-poor young professionals are being locked out of buying close to where they work because they’re stuck paying $50,000 to $80,000 a year in rent and/or repaying HECS student loans to boot.
Deposit Pro, adds Smoli is designed to beat the ultimate deposit dilemma, when young professionals may do everything right yet still seemingly struggle to out-save the market.
As a result, the longer it takes to amass a deposit the greater the deposit becomes.
While Australian national home values have risen 39.1% over the past five years, that figure is considerably higher in some capital cities and regions.
Also magnifying the problem, notes Smoli are the limitations of lenders' mortgage insurance (LMI), which typically disappears once a property’s value exceeds $2 million or becomes prohibitively expensive.
“And if it is available, your allowable loan-to-value ratio falls. Suddenly that 10 per cent deposit still takes a decade to save,” says Smoli.
“It’s absolutely the new normal… unless you’ve got the Bank of Mum and Dad or inheritance behind you, the deposit gap is almost impossible to bridge.”
Instead of offering insurance against a low deposit, Deposit Pro provides a stand-alone deposit loan to help qualified buyers purchase earlier, while still managing their mortgage repayments through traditional lenders.
“ Traditional lenders are telling Australians earning hundreds of thousands of dollars a year that they need to spend a decade or more saving a cash deposit for the home they want,” said Smoli.
“Every year spent saving is a year of lost equity and wealth creation.”
Smoli cites the example of a lawyer earning $350,000 annually seeking to purchase a $2.5 million Sydney property who would need to save for up to a decade to accumulate a $500,000 deposit – and that’s assuming property prices remain static.
Smoli suspects the deposit gap prevents a growing cadre of professionals from seeking mortgages on premium properties which their income would suggest they could otherwise afford to service.
The new loan product is designed to cover a borrower's 20% deposit, allowing them to look for a home loan on the broader market for the remaining 80% of a property's value, avoiding both lender mortgage insurance (LMI) and the higher interest rates associated with low-deposit loans.
However, this facility comes at a price. The deposit-only loan would be paid back at a fixed rate of 9.95% annually and applicants must have the funds to cover stamp duty and other associated purchase costs.
With no restrictive loan terms, customers can access multiple exit strategies on a timeline that suits them, including refinancing to a single mortgage, property sale, or direct loan repayment once equity has been built.
While Deposit Pro clearly wouldn’t suit everyone, M R Advocacy director and co-founder of Scale Lending Mortgage brokers is also witnessing rising demand from high-income professionals unable to pull together a large enough deposit fast enough.
Given that the traditional deposit system appears broken, she urges clients to always compare it to LMI or consider re-investing in more affordable areas.
“At least it [Deposit Pro] doesn’t involve the government owning half your home,” she said.
“We need more alternatives that don’t rely on luck or inheritance.”
Meantime, while most of his clients buy properties under $1 million, buyer’s agent Arin Russell believes a product like Deposit Pro fills a significant gap for time-poor, ambition-rich buyers in prestige markets.
“There’s definitely a stigma around LMI,” said Russell a director at Arin Russell Property.
“So if you’ve got a genuine alternative that’s better tailored for high-end buyers, I think a lot of people would jump on that.”
