Almost 50% of homebuyers don't understand how deposits work and the amount required. So how much do you actually need?
Why do I need a deposit?
A mortgage deposit has a couple of purposes, mainly to buy your share in the property but it also reduces the bank's risk. That’s generally why the bank will require that you have a deposit.
However, from the eyes of a financier, the size of your deposit can affect your borrowing capacity and show to them your ability to repay a loan.
For the buyer, paying the deposit upfront will lower the amount you will have to pay over the entirety of your loan.
Even if you’re eager to get into a home sooner, there are some really good reasons to save for a bigger deposit. On one hand, it means you will need to borrow less money overall, lowering the amount you will have to pay over the entirety of your loan in interest. Your repayments will also be lower helping you with your household cash flow. Some lenders will even allow you to borrow your money at a lower interest rate because there's less risk for them.
How much deposit do I need?
Traditionally a 20% deposit has always been the target. However, this can vary based on a number of reasons. Your required deposit amount will also vary depending on the lender.
Some banks will accept less than a 20% deposit, but you will most likely have to pay Lenders Mortgage Insurance (LMI).
Some lenders may let you borrow up to 95% of the home’s value, therefore you may only need to have a 5% deposit.
How do I get a loan with a smaller deposit?
You will possibly be able to get a loan with as little as 5% deposit. However, there are other costs to take into consideration.
Firstly, you will have to pay for Lender’s Mortgage Insurance (LMI). This is an insurance policy to protect the bank that you have to pay for. This is because they are taking on more risk by giving you a loan with such a low deposit. LMI is usually paid as a lump sum payment when the loan is taken out. Unfortunately, if you decide to change banks and you still need a loan over 80% of the homes value, then you will most likely have to pay LMI again for the new bank as the LMI policy isn't transferrable.
The precise cost of LMI differs between each lender or insurer and depends on factors such as your deposit amount, your employment status, the total value of the loan, and whether the property is used as an investment or principal place of residence.
Other ways to get finance approval with a smaller deposit include using a guarantor, which requires your family or friends to use their property as security against your loan.
There are also some Government schemes that can help buyers – mainly first home buyers – get a foothold on the property ladder. The First Home Loan Deposit Scheme can help first home buyers with as little as a 5% deposit. While the new "Family Home Guarantee" is designed to help single parents with dependants secure a home with a tiny 2% deposit (from 1 July 2021, subject to legislative approval).
What other upfront costs are involved?
You can’t use ALL your savings for your deposit. There are some other upfront and ongoing costs that you’ll need to factor in as well.
There are costs such as your conveyancing fees, home loan application fees, building and pest inspection fees if buying an existing home, and stamp duty (which varies based on the state and value of the home).
Then you still have to meet your regular loan repayments.
There can be ongoing maintenance costs for older properties, bank interest, and loan repayments to make on any property purchase, council rates, land tax (for investment properties), insurances and utility connection fees.
We recommend seeking out a finance professional to help you crunch the numbers.
Luke Jorgensen - Lush Property
Tags - Property Investment; Property Development; Renovation; Valuation; Valuer; First Home Buyer; Buyers Agent; Buyers Advocacy