Haven’t we all talked about the big D, sometime or the other?
The big D, or the home loan deposit, is the biggest worry for most home buyers. And rightly so, as a lot hinges on the amount of deposit prospective buyers can save up.
So, what is a deposit?
A deposit is the initial payment you are going to use to fund your house. Few years back, it was possible to get up to 100% LVR loans (loans for the full value of the property) and even 105% LVR loans (full property value plus additional costs). Sadly, those days are past and lenders often judge your repayment capacity according to the size of your deposit. In fact, if you have up to 20% of the purchase price in deposit, banks might even offer you better interest rates.
How much deposit do I need for a home loan?
Well, going by the market standard, 20% of the purchase price is the golden number for a deposit. An extra 5% for accessory costs such as stamp duty, legal fee, agent’s fee and other payments, and you get the perfect deposit figure for securing a home loan.
There are several advantages of having a bigger deposit:
- More negotiation power
- More lenders to choose from
- Potentially lower interest rates
- No Loan Mortgage Insurance to be paid (this can run into several thousand bucks)
- The lesser you borrow, the lesser interest you pay during the life of the loan
While having a larger deposit definitely has advantages, it doesn’t mean you can’t buy your home if you haven’t been able to save enough in your kitty. Many lenders are ready to offer up to 95% LVR loans, while some non-bank lenders may add an extra percent or two. Also, read here for tips to get your loan application over the line.
What if I don’t have much (or any) deposit?
- For starters, make a budget and use our borrowing capacity calculator to know how much you can afford to borrow as per your income and expenditure.
- Make provision for monthly savings and aim to save up at least 5% of the expected purchase price. It generally takes few months to finalise a house, which can give you some time to accumulate a deposit.
- Alternately, you could use a gift fund, but make sure you have proper documentation to substantiate the gift.
- Third party guarantor loans are also popular wherein your parents could guarantee your loan against their property or bank deposit. However, be sure you’d be able to repay the loan before you put your parent’s hard earned money at stake.
- It is also possible to take deposit bonds in case you are not cash ready but have money locked in investments.
- First home buyers can also take advantage of State grants such as FHOGto fulfill the deposit requirement.
Finally, should I wait to accumulate a fatter deposit or plunge to buy with what I have?
Honestly, what you save over the life of the loan by having a larger deposit, can be made good by steadily rising property prices as you wait up to reach that ‘always increasing’ 20% mark.
The biggest downside of taking a high LVR loan (more than 80% of the property value) is LMI payment. LMI or Loan Mortgage Insurance protects the lenders’ interests in case you default and can run into several thousand dollars. However, it is possible to add up the LMI premium to your loan amount and pay it with your regular loan installments.
Whether you decide to wait up or not is completely dependant on your long-term financial goals. You could pay more interest and save up on the rent or save a bigger deposit in case you are not ready to buy yet.
Whatever you decide, it is a good idea to speak to a mortgage broker before you plan your purchase. Compare low interest rate loans or get in touch with our experts to have your queries answered instantly, for free.
By Vidhu Bajaj