How Much Deposit Do I Need To Buy A House Or An Apartment?
One of the first steps to buying a home is understanding how much you can borrow. Armed with this knowledge you can more confidently house hunt for properties that fall within your price range. Plus, if you are given written pre-approval, you will be able to act quickly and decisively when you find the right property. This can give you a significant advantage over other buyers.
While each home buyer’s situation is different, there are a few factors that will impact the amount of home loan you are likely to be approved for. These include:
- Your household income
- The type of property you want to buy
- The location of the property you’re wanting to buy
- The value of the property you’ve chosen
- You’re credit rating
- Your other financial commitments
- Your assets, including your deposit
Using these variables, lenders will assess your borrowing capacity using the Loan to Value (LVR) ratio calculation. The LVR is the ratio of money borrowed to the amount of security given (the value of the property), expressed as a percentage.
Most lenders are comfortable with an 80 percent LVR. That means you’ll have to put up a 20% deposit. If you want to borrow more than 80% your lender usually requires you to have Lenders Mortgage Insurance.
If your loan application is successful, your lender will give you a home loan guarantee certificate or a pre-approval certificate. This means your home loan will be approved when you find a home you want to buy, provided you meet a few conditions.
Armed with this information you can start home hunting with confidence, knowing how much you can spend.
What is a home loan deposit?
A home loan deposit is the home buyer’s initial contribution to the purchase price of a property. It doesn’t come from a lender but rather from your savings or other personal sources.
Very few lenders will allow 100% or zero deposit financing as the risk to the lender is too high. As a result, they expect the homebuyer to put some of their own money, in the form of a deposit (usually from savings), into the purchase of the property. The reasons are:
- Homeowners who have invested their own money in the property are less likely to default or stop paying the home loan
- If the lender must sell the property for any reason, they are not exposed for the entire value of the property, which can limit the potential losses if the home is sold for less than the remaining home loan balance
- Saving for a deposit requires discipline and budgeting. This can set up borrowers for successful homeownership and lenders like to see this
- When the buyer has a financial stake in the property, it helps lower the risk to the lender and provides more benefits to the purchaser by way of less funds required to settle the loan or being offered a more competitive interest rate due to loan to value ratio being lower.
How much deposit do I need to buy a house or apartment?
The lowest deposit most lenders will consider is 5% of the sale price, although many will require significantly more; more around the 10% - 20% mark.
While you don’t always need a big deposit to take out a home loan, there are considerable benefits to having a larger deposit that are worth considering. These include:
- Borrow Less - The more money you can put down as your deposit, means you are borrowing less and therefore have less to pay back to your lender. Over the duration of the loan, you’ll be paying less interest and therefore stand to save a lot of money
- No Lenders Mortgage Insurance - Generally, if you want to borrow more than 80% of the property’s value, the lender will require you to pay a Lenders Mortgage Insurance premium. This is effectively an insurance policy for the lender against any losses that may occur in the event you default on your loan. If you have a 20% or more deposit your lender will most likely not require you to pay LMI, which can save you thousands
- Choice of lenders - Saving a larger deposit allows you to access a wider range of loans and access to more lender’s products
- Greater borrowing capacity - by showing you can save a larger deposit your lender may be more inclined to let you borrow more money
- Proof of savings - one of the criteria lenders look at when assessing you for a loan is your ability to save. By saving a larger deposit, you’ll be able demonstrate your savings ability, strengthening your application
For more information on how much deposit you need to buy a house or apartment click here.
A final word
It’s a good idea to talk to your mortgage broker early in the process. They can be instrumental in helping you set up a saving plan, working out your deposit goals and of course when the time is right, can help you find the most suitable and competitive home loan for you. To talk to one of our Oxygen Home Loan Consultants click here.
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