COMPLETE GUIDE TO HOME DEPOSITS

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.

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 

• 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. 

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. 

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.

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. 

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. 

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.