When you make the decision to purchase a property you’re also deciding to enter the property market, a world that can be daunting and full of the unknown. If you are looking to buy a house, it’s not uncommon to get confused about how much of a deposit you’ll need.
Here we’ll break down everything you need to know about home loan deposits.
In simple terms, a home loan deposit is the monetary amount you’ll be required to put down in order to be given a home loan. The amount required will depend on your choice of lender, but on average, it is typically 20% of the purchasing value, or price, of a home. Your loan in return will be approximately 80% of the home’s purchasing value.
In some cases, lenders are able to provide clients with loans of up to 95% of the property’s value, however this will depend on the lender and the borrower’s specific circumstances.
Lenders need a home loan deposit from borrowers as it acts as a safety net. When you approach a lender for a loan, the first thing they will do is assess your reliability and financial stability. Lenders need to determine whether or not you will be a risk to lend to. They need to know that you’ll be able to make regular repayments on your loan without any missteps.
Lenders will typically always review the following:
Your bank statements and PAYG statements
Your credit file
Any financial difficulties you may have had in the past
Your income and employment history
As a general rule, most buyers aim to have a deposit more than 20% of the property purchase price. Higher risk deposits range from 10%-20% of the purchase price, depending on the buyer's credit history. Some lenders will also accept a 5% deposit though this comes with extra criteria.
When you purchase a property, the deposit isn’t the only cash you’ll hand over. You’ll also need to set aside funds to pay for stamp duty, pest and building inspections, legal and conveyancing fees, council fees, and possibly Lenders Mortgage Insurance.
One extra fee many people don’t know about is that lenders charge a fee to set up a home loan and that can be as much as a $1,000. However, some lenders will waive this fee - Lendi’s Home Loan Specialists can help you with this.
If your deposit is under 20%, you will likely incur costs relating to Lenders Mortgage Insurance (LMI). This insurance is designed to cover the lender when the borrower is higher risk (with a deposit under 20%) and more likely to default on their home loan. LMI gives the lender the flexibility to offer you a larger percentage of your loan, but you will need to pay this insurance yourself on top of your monthly repayments.
Unfortunately, lenders no longer allow offer 100% home loans since stricter regulation and criteria was put in place. However, there are other ways to secure a loan with a lender. If you don’t have at least a 5% deposit, you may be able to use your parents’, or another close family member’s, equity in their own property or other real estate asset to guarantee your loan and to help you cover the cost of a deposit.
A low deposit home loan is a home loan where the borrower has a deposit of less than 20% of the property purchase price. A number of lenders offer options where you can borrow up to 95% of the property purchase price. However, this option does incur extra fees with strict criteria including paying Lenders Mortgage Insurance.
Lenders Mortgage Insurance (LMI) is a fee charged by home loan lenders. It protects the lender in the event that the borrower defaults and is unable to meet their loan repayment obligations. Lenders Mortgage Insurance is typically required by a lender if the borrower is borrowing more than 80% of the property purchase price. LMI is non-refundable and non-transferrable.
LMI is calculated as a percentage of the entire loan amount. The fee the borrower pays increases as the loan to value ratio (LVR) and loan amount increases.
This fee varies slightly from lender to lender and depends on a number of variables including if the loan application is for a new purchase or refinancing an existing loan, if the property will be owner occupied or for investment purposes, and where the property is located since stamp duty is payable on LMI.
LMI can be charged up front or can be added on top of the base loan amount being requested. This means that your repayments will be calculated based on the total overall loan amount including the cost of LMI.
If you are looking to avoid paying Lenders Mortgage Insurance (LMI), there are a few things you can do.
Firstly, try to grow your deposit as much as possible. Consider whether it is financially smarter to wait and grow your deposit before committing to paying LMI now.
If possible, ask family members to chip in by ‘gifting’ you funds towards the deposit and costs. They will need to provide written confirmation that this is a true gift and does not need to be repaid. If the amount they are gifting means that you still need to borrow more than 80% of the value of the property you will still need to be able to show that you have accrued 5% of genuine savings yourself. However some lenders will factor in your current rental expenses as a contribution towards this genuine savings requirement.
Ask your lender if your job is viewed as a low risk occupation. Low risk occupations include roles that are considered to have a lower risk of redundancy such as medical doctors, engineers and accountants. Specific lenders will sometimes waive LMI for applicants in low risk occupations up to a maximum LVR of 90%.
Another option to avoid paying LMI is approach a lender with a guarantor. A guarantor is either a parent or close family member who will use some of the equity in their own home as a part of your home loan. Their equity value needs to be sufficient to cover 20% of the property value and some lenders will allow up to 27% to be used to cover associated costs as well (e.g. stamp duty, solicitor fees).
It's important to remember that guarantors are not regarded as the co-applicant on the loan, but they are rather used as security and this means that the lender will hold the title for their property while they remain guarantors to your loan. This means that if you ever default on your repayments, your guarantor will also be liable to repay the funds. Not all lenders will accept a family guarantor and those that do have specific requirements in regard to applications of this kind to ensure that the guarantors are aware of their obligations and are protected.
The biggest advantage of paying a low deposit is that it minimises the amount you need to save and pay up front when it comes to buying a property. Doing this will allow you to purchase your home more quickly.
The biggest drawback to a low deposit loan is that is going to take you a lot longer to pay off your loan and can mean incurring the additional cost of LMI.
Also, starting out with only a small amount of initial equity in your property means you are at greater risk of falling into negative equity if there is a drop in property market value. Negative equity is when you owe more money on a property than its current value.
It is common for many of us to struggle when it comes to providing a decent deposit amount for a home loan. No deposit home loans are no longer available in Australia, however, some lenders accept deposits as low as 5% depending on the borrower’s credit history and the overall merits of the loan application. Most of these lenders require the maximum loan to be 98% when LMI is added onto the loan amount.
Banks are inherently conservative and cautious with those they lend to, that is why 95% loans come with strict criteria. There are a number of ways you can improve your chances of getting such a loan approved.
You should have a good history of paying bills on time, prove that you have genuine savings, remove or minimise existing debts and close credit accounts. Your finances should show that you are budgeting for your current and future finances, as well as maintaining a steady job and income. Any other assets you own will be taken into account as well.
One of the biggest downsides of a 95% home loan is that you are highly likely to incur the additional cost of Lenders Mortgage Insurance (LMI). This is an extra fee charged by the lender to protect themselves in case you default on your loan. This is charged because borrowers with an LVR greater than 80% are considered to be a higher risk.
Another downside to this type of loan is that you are likely to be charged a higher interest rate. Lenders will generally offer more competitive rates to customers who are able to pay a higher deposit. Since interest is calculated as a percentage of the overall loan, the higher your deposit, the less you owe, which means you will be paying interest on a lower amount.
Many lenders will have the option of offering 95% home loans, but they are sometimes hesitant to offer them to a borrower due to the higher risk factor for the lender. In order to be granted a 95% home loan, you may have to adhere to stricter guidelines and provide more documentation and details in support of your application.
Put simply, a no deposit home loan involves a borrower receiving a home loan without having to put down a deposit first. Since the Global Financial Crisis of 2007, regulations have tightened up to protect customers against economic uncertainty. As such, the days of borrowing 100% of the purchase price, requiring no deposit, are gone.
However, that isn't to say that you can't get approved for a 100% home loan if you do not have savings for a deposit.
In addition to saving for your deposit, you also need to account for some other costs associated with purchasing a property. These include government charges such as stamp duty and the registration and transfer of the property title which varies depending on the state or territory the property is in and the value of the property. If you are a first time buyer then you may be eligible for stamp duty concessions.
You will also need to cover the costs of your solicitor’s or conveyancer’s fees and sometimes a fee charged by the lender for setting up your loan.
The total additional costs for your property purchase will depend on factors such as where the property is located, whether you are a first time buyer and the value of the property. However as a rough guide you should plan for these costs to be 5% of the purchase price.
Saving for your first home can seem like a daunting task. Here are some useful tips to help you build up your property deposit.
It may not seem like a lot at the time but it definitely adds up in the long run. This is a nice and easy tip for people who find it hard to save money. When you get your paycheck simply transfer 10% to your savings account (or an account you don’t have easy access to) and keep doing this until you reach your goal. Even set up an automatic transfer to take place the day you get paid, that way it’ll always happen.
It’s always best to start off your home loan journey with a clean slate. This means paying off all your credit cards and any debts you have, the last thing you want is to be paying off your home loan, credit card and any other debt all at the same time. If this isn’t immediately possible, consider consolidating these debts into your home loan for a lower interest rate.
Another reason it’s important to remove any debt is the fact that a lender will assess your credit file when you apply for a loan. This is because they need to determine your ability to make repayments on time as well as determine if you are a high risk borrower. If possible, close out credit accounts as well, as these can be seen as potential debts, despite you not actually being in debt.
This may seem like a no-brainer for some but that doesn’t mean it’s not worth mentioning. It’s pretty simple to keep an eye on how much you spend weekly or monthly.
Keep your receipts and at the end of the week or month calculate how much you’ve spent on total, then cut out anything that is unnecessary. This can feel harsh but it’s the way to buy a house.
This budgeting could be buying your morning coffee twice a week instead of every day, or skipping it entirely. Take lunch from home instead of buying and consider suspending content subscriptions. All these things seem minor now, but they can add up, which means so can your savings when you cut these activities.
Deciding which home loan best suits your needs is a decision that should not be entered into lightly or quickly. This is a massive decision, so take your time with it and shop around with plenty of lenders.
Research what they’re willing to offer you in terms of rates and deals, you may be surprised to find that your future home loan may be more affordable with an unexpected lender than originally planned.
This can also mean a lower deposit in some cases, helping you buy your home sooner. Lendi compares rates from over 30 lenders so if shopping around seems like a lot of effort, compare these rates in seconds.