COMPLETE GUIDE TO HOME DEPOSITS
Understanding home loan deposits - an in-depth guide
Not surprisingly this steps comes with many questions. Questions like ‘how much deposit do I need to buy a house? Or ‘can I buy a house with no deposit? In order to help answer all your burning questions we have created this home loan deposits guide.
We hope it helps you.
WHAT IS A HOME 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 has to 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 also 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 HOUES OR AN 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.
To put this in perspective if you were looking to buy a $600,000 property a:
- 5% deposit would mean your deposit would be $30,000
- 10% deposit would mean your deposit would be $60,000
- 20% deposit would mean your deposit would be $120,000
Keep in mind you also need to ensure you have extra funds to pay for stamp duty on the property and for professional services such as conveyancing, application fees, registration of mortgage and transfer of the title details.
Plus, if you home loan amount is more than 80% of the purchase property’s value, most lenders will require you to pay Lenders Mortgage Insurance (LMI). This is a one-off fee, used to mitigate the risk of lending money to someone with little savings.
LMI costs vary depending on each percentage your home loan is over 80% of the value of the property and also increases dependant on the amount of funds being borrowed. LMI covers the costs to the lender if the property is sold quickly and covers the shortfall between the sale price and the amount you still owe the lender. It does not cover you for not making home loan repayments.
Different lenders have different policies around LMI so make sure you talk to your Oxygen Home Loans Consultant to know the differences.
For more detailed information read How Much Deposit Do I Need To Buy A House Or An Apartment here.
SMALLER VS LARGER HOME DEPOSITS - WHAT IT MEANS TO YOU
While you don’t always need a big deposit to take out a home loan, there are considerable benefits to having a larger deposit. 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 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. 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 or offer a more competitive interest rate on your home loan
- 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 therefore strengthening your application
WHAT COUNTS TOWARDS YOUR HOME DEPOSIT?
Lenders will assess a number of factors when determining the size of a home loan deposit. They will look at:
- Genuine savings - these are regular savings paid into an account for a period of at least three-months with no withdrawals from the account during this period. These show the lender that the borrower has a capability to maintain the repayments on a home loan.
Many lenders will also view the following as proof of genuine savings
- Term deposits held for at least three months
- 12 month Rental Ledger
- Shares held for at least three months
- Inheritance when held in an account for at least three months
- Equity in an existing property
- Gifts of money - with house prices consistently rising, more and more parents are helping their children get onto the property ladder with a gift of money. Lenders will look for proof that it is a gift and is non-refundable. You may be required to provide a statutory declaration stating this
- Proof of regular rent repayments - some lenders will consider your regular rent payments especially for owner occupied purchases, as genuine savings
- Using a guarantor or family guarantee - some lenders will consider a guarantor who agrees to offer part of their home equity (usually 20%) to top up your cash deposit as additional security for a home loan
- First homeowners grant (FHOG) - A lot of lenders allow customers to use a First Homeowners Grant as a deposit. In many cases it is also possible to combine the FHOG with other government incentives. Each state and territory have their own version of the first homeowner grant. To find out if you are eligible click here.
TIPS ON HOW TO SAVE FOR A HOME LOAN DEPOSIT
To help you save for your deposit here are some ideas from Oxygen Home Loans:
- Review your budget - Use our Oxygen Home Loans Budget Planner to determine what you are spending your money on each month and how much money you have left after you’ve covered your key expenses
- Reduce expenses - By understanding where you’re spending your money, you can look to see if any savings can be made. Can you take your lunch to work, can you change your mobile plan or reduce your food or utility bills?
- Set up a Direct Debit - When you know how much you can save each month set up a direct debit into a high interest savings account directly from your wages. If the money doesn’t go into your everyday account, you are less likely to miss it. Lenders like to see a consistent savings plan so when it comes time to talk to them you can show proof of how good you are
- Pay off or reduce your other debts - It’s a bit pointless to be paying money into savings account while you’re also paying large amounts of interest on your credit cards or other loans each month. If possible, it’s a good idea to pay these debts down or consolidate debts so you can focus on saving for your home. Reducing credit card limits and credit card debt has a positive effect on your borrowing power, this could be closing credit cards or store cards that you don’t need or use.
Ideas to help you save for a deposit faster
If you are keen to save for your home loan faster, you may need to make some more radical changes such as:
- Move back in with your parents
- Pick up a casual job on top of your current work
- Cut back on how many times you go out each month
- Resist buying new things and make do with what you have got
- Tip any bonuses or windfalls straight into your savings account
Make sure you also investigate if you’re eligible for the First Homeowners Grant in your State or Territory. The FHOG comes as a one-off payment to assist First Home Buyers to get into the property market. As you’d appreciate when you’re buying a home every dollar counts.
Click here to see if you’re eligible for the First Homeowners Grant or for more information about the incentive.
BUYING A HOUSE WITH NO DEPOSIT - IS IT POSSIBLE?
Given the risk of lending to someone with no deposit, lenders normally have very strict criteria when assessing a no deposit home loan application. Some of the requirements include:
• High credit score with one of the main credit reporting agencies
• Regular debt repayments on credit cards, rent, car loans etc demonstrate your ability to make regular payments which is important for loan repayments
• Stable employment history with an income that is high enough to service the loan
If you are considering applying for a home loan with no deposit, here are some options that might help you get your home sooner:
Family security guarantee
One option that is becoming increasingly popular with first home buyers is getting a family member to go guarantor on the loan.
Using a family guarantee or a limited guarantee - some lenders will consider a guarantor who agrees to offer part of their home equity (usually 20%) to top up your cash deposit as additional security for a home loan.
There are additional requirements for a guarantor and they they will need to provide documentation to the lender along with proof they have sought independent legal and financial advice regarding becoming a guarantor. Due to the risk involved many lenders suggest guarantors set a limit to their guarantee. For instance, 20% of the property’s value. This is enough for the child to avoid Lender Mortgage Insurance, but also limits how much the parents would need to pay if their child was unable to make their loan repayments.
Large monetary gifts received, perhaps from your parents or an inheritance can be put toward a deposit. If it was a gift, lenders will often require a statutory declaration from the giver stating that it does not need to be repaid.
First Home Owners Grant
Each state and territory offer a First Homeowner Grant as a way to encourage and assist home ownership across the country. The size of the grant and the eligibility criteria varies, but in most places, it applies to first time property owners who are either purchasing an existing home that has never been lived in or building an entirely new home.
Government benefits for first home buyers constantly change, make sure you check the website of the Office of State revenue in your State or Territory for the most up to date information.
First Home Loan Deposit Scheme
This is an Australian government funded initiative which partially guarantees some low deposit loans by helping eligible first home buyers avoid paying Lenders Mortgage Insurance (LMI).
If a first-time buyer has less than 20% deposit, they will normally be required to pay LMI which can be quite hefty. However, under this scheme, eligible first home buyers can purchase a modest home, with a deposit as little as 5% (lenders criteria applies) and the Commonwealth Government will guarantee the difference between what the first home buyer has saved, and the 20% deposit threshold lenders usually require before they’ll provide a loan without LMI. The government says this could save first home buyers as much as $10,000 or more.
The property price threshold varies depending on where you are buying. To find out the property price caps for the area you wish to buy in click the link below.
Equity you have in another property
If you have positive equity in a property you already own, or in other words if it is worth more than you owe on the loan, you may be able to use some of the positive equity on that loan as a deposit towards buying another property. The lender however will want to make sure you can afford to pay both home loans at once.
Talk to your Oxygen Home Loans Consultant about your situation as they may be able to help guide you here.
WHAT IS LENDERS MORTGAGE INSURANCE (LMI)?
When buying a property, most lenders require you to have saved a deposit of at least 20% of the purchase price, plus have additional savings to cover the extra upfront costs such as stamp duty and legal fees. If you don’t have the 20% deposit, lenders have less security to protect them and therefore carry more risk when they lend to you.
To put this in context, if you were buying a house for $600,000, lenders ideally would like you to have a deposit of $120,000 (20% of the property’s value). If you have only saved $60,000 but you have sufficient income to support the loan, you may be able to take advantage of Lenders Mortgage Insurance.
LMI is payable at settlement. Your lender may agree to add it to your loan amount, which increases your loan to value ratio, and also means you’ll end up paying more interest over the life of your loan as well as paying more in repayments. Talk to your mortgage broker about the options that suit your needs.
An Oxygen Home Loan Specialist can speak with you and calculate how much you would need to pay in LMI or how to avoid it!
WHEN AND HOW DO I PAY THE DEPOSIT?
When you buy a property you will be required to pay the deposit (usually 10%) to the vendor as part of signing the Contract of Sale.
When it is time to settle the property and pay for it in full, the buyer will hand over the remaining deposit money and the lender will pay the difference directly to the seller or their financial institution.
How do I pay my deposit?
The most common ways to pay a deposit are via:
- Personal cheque
- Bank cheque
- Bank transfer
It’s a good idea to talk to the real estate agent about how they prefer to receive the deposit. This is particularly important if you are buying a property via auction as you need to be prepared to hand over the deposit money immediately after the auction when you are signing the Contract of Sale.
WHAT IS HOME EQUITY AND HOW CAN IT BE USED TO BY A PROPERTY INVESTMENT?
Equity is the difference between your property’s market value and how much you still owe on the property’s home loan. If your property is now worth $850,000 and your loan is $200,000, you have $650,000 positive equity in the property.
If you are looking at buying another property, your lender may allow you to use some of the positive equity on that loan as a deposit towards buying another property, assuming you can repay both home loans at once.
HOW MUCH DEPOSIT IS REQUIRED FOR AN INVESTMENT PROPERTY?
Property investors typically need a 20% deposit to buy an investment property, however some lenders allow a lower deposit but require Lenders Mortgage Insurance to be paid.
An investors deposit can comprise of money that you have saved in a bank account as well as positive equity you have in another property, or a mixture of both.
Investment loan interest rates are often higher than homeowner interest rates, so ensuring you can service this loan along with any other loans is an important consideration and should be discussed with your mortgage broker.
WHEN SHOULD I TALK TO A MORTGAGE BROKER?
It’s a good idea to talk to your mortgage broker early on 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.
I'M READY TO TAKE THE FIRST STEP AND TALK TO A HOME LOAN BROKER
Are you ready to take the first step to home ownership?
Now is a great time to talk to an Oxygen Home Loans Specialist. They can help you further understand the home loan deposit process and work with you to map out a plan for your and your goals.
At Oxygen we work for you, not the banks, and pride ourselves on high quality advice. An Oxygen mortgage broker can find you the right loan, and does it hassle free.