Being a low income earner doesn't mean it's impossible to own your dream home.
Depending on your budget and deposit size, you could find yourself getting onto the property market ladder with a low income home loan in no time at all.
Find out how you could achieve your goal of home ownership with a low income.
What is considered 'low income' in Australia?
In Australia, there is no real definition for classifying a low income earner.
However, according to the ATO's rules for tax offsets, a taxable income of $37,500 or less is classified as a low income eligible for a $700 tax offset.
If you compare this to the ABS' average annual wage (for all employees) of $69,924, it is considerably less. Thus, if you earn under $37,500, you could probably class yourself as a low income earner.
What is a low income home loan?
A low income home loan is very similar, if not the same to a standard home loan. The only visible difference between the two is borrowing capacity and serviceability - a person's ability to repay the loan.
While there is no set rule, lenders will be more vigilant with home loan applicants on a low income. The bank or lender will go through your application very closely to determine your borrowing power and whether you'd be fit enough to manage your mortgage repayments. Many banks used what's called the household expenditure measure or HEM to determine your ability to pay off a mortgage. If successful, the bank or lender will then determine the interest rate based on your financial and credit history.
Having a low income also means your chance to qualify for some of the top-tier home loan products could be difficult. However, there are lenders out there that specifically tailor their products towards low income earners.
How to get a mortgage on a low income
1. Prove you can afford the mortgage repayments
As mentioned above, serviceability is an important factor that lenders consider when deciding whether or not to accept your home loan application.
A lender will calculate your serviceability to ensure you can afford to take on a mortgage, and to also find out how big a home loan you can manage. The serviceability result depends on the size of the prospective loan, your income, and how much money you have left over after paying all your liabilities and general living expenses. If it's evident you may struggle to make ends meet, your application will likely be rejected.
To help prove to lenders that you're capable of paying off a home loan, here are a few things you can do:
- Don't find a property that's way out of your price range - stick to a strict budget.
- Assess your living costs to find out how much you spend (weekly, fortnightly, or monthly) and make any necessary changes needed to reduce these costs e.g. don't use Afterpay, stop eating out, reassess your internet plan, etc.
- Clear all your credit card debt, and even your credit card: Lenders will likely assess your total credit limit, even if unused, and reduce your borrowing power accordingly.
- Have a savings pot or account handy. If you can demonstrate you put money into savings consistently, this shows lenders you're committed and good with money.
2. Clean up your credit score and history
A credit score tells a lender whether the borrower can afford a loan, the likelihood of them paying back a loan, and it can also determine their interest rate, and their credit limit.
Find out what your credit score is before you decide to start applying for home loans. There are three main credit rating agencies in Australia - illion, Equifax, and Experian. They will provide an in-depth credit report for free for you once every few months.
These three also own credit score websites Credit Simple, Credit Score, and Credit Savvy respectively. With these services you can sign-up to regular credit score updates - while not as in-depth as a full credit report, the more regular reporting can alert you to if something is amiss.
Having a good credit score will improve your chances of getting approved for a loan. There are five credit score bands you can fall into with ranges typically from 0-1200 (depending on the credit reporting agency). As always, the higher the score, the better.
| Credit Score Range | illion/Credit Simple | Equifax/Credit Score | Experian/Credit Savvy |
|---|---|---|---|
| Excellent | 800 to 1000 | 833 to 1200 | 800 to 1000 |
| Very Good | 700 to 799 | 726 to 832 | 700 to 799 |
| Average | 500 to 699 | 622 to 725 | 625 to 699 |
| Fair | 300 to 499 | 510 to 621 | 550 to 624 |
| Low | 0 to 299 | 0 to 509 | 0 to 549 |
Most mainstream lenders look for borrowers to be sitting in at least the average to excellent range to attain competitive interest rates. With home lending, lenders generally look more holistically at a borrower's financial situation than just the credit score.
If you need to improve your credit score, try doing the following:
- Make any repayments you have on time e.g. credit card, utility bills, rent, etc.
- Minimise new credit applications
- Pay off debts as soon as possible
- Don't apply for multiple credit products at once
- Lower your credit card's limit
- Check your credit report for any inaccuracies
3. Have a good deposit saved up
While it may be easier said than done, having a large deposit can put you in a good spot with a lender.
A large deposit (20% or more) will avoid you having to pay Lender's Mortgage Insurance (LMI), and will also significantly improve your chances of home loan approval as the lender will see your consistent savings record. Further, it shows the lender you have financial discipline and can make regular mortgage repayments on time.
The other advantage of a bigger deposit is it decreases the amount you need to borrow from the lender, which is important for a low income earner.
Tips on how to buy a house with a low income
Here are some other tips and tricks on how to buy a house with a low income. To improve your chance of home loan approval, consider the following:
1. Use a guarantor
A guarantor can be a good way to boost your chances of home loan approval with a low income. Some lenders allow you to borrow up to 110% of the property's value when using a guarantor.
Typically, a guarantor is an immediate family member that acts as reassurance to a lender if you were unable to continue paying off the loan. Guarantors use their own property as a security for the loan, which can be a big risk for them. The lender will review the guarantor's financial situation to make sure they can help pay off the loan if the need arises.
2. Apply for the first home owner's grant
First home buyers across Australia can get help from state governments in the form of the First Home Owner Grants (FHOG). First home buyers can get bonuses of up to $30,000 depending on where they reside - this can make a real difference when saving for a deposit.
If you're a low income earner looking to buy your first property, here is the general eligibility criteria you'll have to meet:
- You must be an Australian citizen when you enter the loan
- You must be at least 18 years old
- You can be earning up to $125,000 as a single person or $200,000 as a couple
- You must intend on living in the property
- You must be a first home buyer
Be aware that different states have different requirements when it comes to the FHOG so make sure to do your research.
3. Use government housing loans for low income earners
Along with the FHOG, there are other government schemes available for low income earners to help them get into the property market quicker.
For instance, the Queensland Housing Finance Loan is available for Queenslanders who can afford to buy or build a home but can't get finance from a bank or lender. If you have an income below $141,000 per annum (amongst other eligible criteria), you can get into the property market with as little as a 2% deposit and avoid paying LMI.
In Victoria, the HomesVic Shared Equity Initiative allows low income earners to qualify for a home loan with as little as a 5% deposit. In this scheme, you enter a shared agreement with HomesVic where they will give you up to a 25% contribution towards the property's purchase price in exchange for the government owning a share of the home. When the time comes to sell the property, HomesVic would share any gains made.
Other programs include South Australia's HomeStart Finance Loan, Western Australia's Key Start and Shared Equity scheme, and Tasmania's HomeShare scheme.
Visit your states' government website to find out more on what incentives are on offer for low income earners.
4. Consider a joint application
If possible, apply with your partner or a co-signer. This way, both income sources will be taken into account, raising your capability to repay the loan. If you do go down this path, make sure both applicants have good credit and financial histories.
5. Borrow well within your means
The bigger deposit you have, the less you have to borrow, which means the higher the chance of your application being approved. For a lender, a lower loan size means less risk as it's more likely you'll be able to make repayments comfortably.
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