How much deposit will I need to buy a property?
One of the biggest hurdles to buying a property is saving a deposit. The deposit is used to purchase part of the property and will be a factor in your loan application assessment by a lender or mortgage insurer. But it can be hard knowing exactly how big your deposit should be.
What percentage should your home loan deposit be?
While in the past some lenders offered home loans without requiring the borrower to have sufficient funds for a deposit, that’s not the case with most lenders anymore.
The minimum deposit to take out a home loan is 5% of the total purchase price of the property, but this will depend on how much you are borrowing and the type of loan.
You will also need to have additional money available to pay the fees and charges associated with your loan, so it’s a good idea to speak to your Mortgage Broker to make sure you’ve got the deposit and the additional funds that you need.
What you need to think about
Home loan lenders generally use what’s called a loan to value ratio (LVR) as the first step to calculate the amount of deposit you will need. For example, an LVR of 95% means that the amount of your loan is 95% of the value of the property. If the property is valued at $800,000 and you have an LVR of 95%, you can borrow $760,000. The remaining $40,000 would come from your deposit.
The amount of LVR that a lender may ask for is dependent on the property value, but it is also considered in relation to the borrower’s circumstances and which particular product they are applying for. The borrowers circumstances in the loan calculation include things like their income and their credit score.
Home loan lenders will assess your application on all its individual merits. Rather than relying on a credit score, one of the other factors may be looking at your ability to save a deposit.
Mortgage insurance on low deposits
Most banks may be willing to lend to people who have a deposit of less than 20%, but they will require you take out what is called lenders mortgage insurance (LMI). This is insurance that covers the lender if you fail to pay back your loan – it is designed to be an extra buffer for the lender’s risk.
Some other lenders would need to seek third-party insurer approval, which adds in another step in the process and may make it more difficult to obtain a loan. However, some lenders do not require third-party LMI approval which can speed up the home lending process.
Extra costs when buying a property
Another thing to remember when you’re working out how much money you need to save before you buy your property is that the deposit only covers the property price. There will be other costs you will have to pay upfront that will also need to be saved for. Things like conveyancing, lender’s fees and stamp duty. It’s worth adding in all these when you are doing your doing your sums. We recommend speaking to your conveyancer to confirm the costs involved, alternatively you can use our stamp duty calculator and property buying cost calculator.
Genuine vs non-genuine savings
It’s important to remember that some lenders won’t accept a gifted deposit as genuine savings – for example, a loan from your family or relatives. It's a good idea to do your research before assuming that a gifted deposit will secure your home loan approval.
Some home loan lenders will accept 100% of gifted deposits, however an assessment of your individual circumstances and eligibility based around your credit history, employment, income, and existing debt is still required. Other forms of deposits, such as a second mortgage, private loan and non-genuine savings may also be accepted.
To find out more about the home loan products that are most suitable for your situation, speak with your trusted Mortgage Broker today.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.