5%, 10%, 20%... if you’re wanting to buy your first property, it’s important to understand how much deposit you need.
Saving for a home deposit can be a gruelling task. Especially when it feels like the goal post is constantly moving further and further away.
With the median house price across Melbourne increasing to over $850,000 in 2017, saving a 20% deposit means you need to save $170,000 (that’s approximately 8,500 smashed avocado breakfasts).
So when you consider your deposit amount, you will generally fall into two categories – less than 20% or more than 20%. Let’s have a look at each situation.
Banks will lend you money against the value of the property. if you default on your payment or can’t afford to make the repayments, they will repossess your property and sell it to recoup their costs.
If you put down a deposit of 20% or more, the banks feel this is a safe buffer to get their money back in case you can’t keep up with repayments. The likelihood of the property falling more than 20% is unlikely (although it can happen – more recently in the USA where some properties halved in value.)
So with a 20% deposit or more, most lenders will be willing to offer you finance on the property – as long as you can pass their other affordability tests.
But some banks are willing to lend you money for a little as a 5% deposit. If you consider the same $850,000 property in the example above, with a 5% deposit, you’ll only need to save $42,500 – this seems much more achievable.
There is a catch though.
If you put down a smaller deposit, you will be required to pay lenders mortgage insurance. It’s a protection policy (paid by you) which the lender will take out to mitigate the risk of lending you money. The cost of this insurance can be pretty significant – sometimes up around 2% - 2.5% of the entire loan amount.
The insurance is paid as a one-off premium and can be included as part of your home loan. If you chose to pay it off this way as opposed to a lump sum, then you will have higher monthly loan repayments and you will also be paying interest on the amount.
Depending on your situation and the value of the property you’re looking to purchase, some first home buyers are opting to get into the market sooner rather than later by paying a smaller deposit upfront and choosing to pay higher monthly repayments which include the additional lenders mortgage insurance just to get their foot on the property ladder.
So if you’re looking to get into the property market, it’s important to speak to your lender about all of your options. The more you know about all the fee’s you’ll be up for, the better position you’ll be in to make the right decision for you.