Deposits and Home Loans

Deposits and Home Loans

You’ll have to raise a sizeable deposit for the majority of home loan products. Where this money comes from matters just as much as the size of the deposit.

| | 6 minute read

Raising a deposit is probably one of the biggest challenges you’ll face when buying a house. The fact that the amount you need depends on the lender adds further complications.

How Much Do I Need?

The majority of lenders will want you to have at least 5% – and usually 10% – of a home’s value as your deposit. For example, you will usually need a minimum of between $25,000 and $50,000 to put down a deposit on a $500,000 house.

If you’re an investor, it’s likely that you’ll need a minimum of 10% to cover the deposit. However, those in particularly strong positions may be able to access loans with a loan to value ratio (LVR) of over 90%.

Additional Property Buying Costs

You also need to raise money to cover the fees associated with buying a house. In addition to the deposit, you have to pay stamp duty and legal fees. Many lenders also charge fees for processing your home loan application. This can add thousands of dollars to the amount you need to buy the home.

However, Lender’s Mortgage Insurance (LMI) is often the largest additional cost. Lender’s use LMI to protect themselves against the risk of a borrower defaulting on the loan. If you offer less than a 20% deposit, you’ll usually have to pay LMI.

Furthermore, you must think about how your deposit will affect costs during the course of the home loan. A small deposit means your loan has a larger principal. You will pay more interest over time than somebody who’s paid a large deposit. Some lenders also offer lower interest rates in return for high deposits. As a general rule, the less risk you present, the less interest you’ll pay on the loan.

Happily, you may be able to access some government schemes to help you cover these costs. For example, the First Home Owners Grant (FHOG) offers thousands of dollars to some first-time buyers. Also, many states have their own incentives, such as waiving the stamp duty.

Why is a Deposit Needed?

You need a deposit to show lenders that you don’t present a risk to them. The larger the deposit, the less risk the lender takes on when it gives you a home loan.

Your deposit must come from genuine savings, which is usually money you’ve placed into a personal savings account over a period of at least three months. This account must be in your name.

There are some ways to access home loan products if you don’t have genuine savings. However, genuine savings prove you’re capable of saving money reliably and regularly, which boosts a lender’s confidence in your ability to repay your home loan.

What Are Genuine Savings?

The reason some lenders might refuse your application is due to the source of your deposit. Each lender differs when it comes to the money they accept, but you’ll need what’s referred to as ‘genuine savings’ for your deposit.

Generally, genuine savings refers to:

  • Money in a savings account that is in your name;
  • Tax refunds;
  • Inheritance;
  • Monetary gifts;
  • Money in a First Home Savers Account;
  • Money raised through the sale of shares or assets.

Speak to your lender or a mortgage expert to find out exactly where your money needs to come from to count as genuine savings.

Why do I Need Genuine Savings?

Lenders prefer to see proof that you can make consistent payments over time. Regularly putting money into a savings account over a number of months shows that you can be relied upon to make your home loan repayments.

Some lenders also accept proof that you’ve paid rent for at least three months as a substitute for genuine savings.

How you save matters as well. Lenders like to see consistent payments go into your savings account. Paying a couple of hundred dollars per week into your account shows more reliability than putting a lump sum in every few months.

Can I Use Equity for a Deposit?

Current home owners will build equity in their properties as they make repayments on their home loan. Equity represents the amount of the property that you own. For example, if you have $150,000 left to pay on a $400,000 loan, you have $250,000 in equity.

You can use your equity in place of genuine savings, assuming you’ve built enough equity to cover the cost of refinancing. Remember that you have to cover the rest of your original loan before you can take out a new one.

Still, you can use whatever remains as a deposit on a new property. Some lenders will even take negative gearing into account when they work out how much money you can borrow.

Can I Get a Home Loan Without a Deposit?

Lenders no longer offer 100% LVR on their home loans, which usually means you need at least a 5% deposit. However, you can avoid paying a deposit altogether if you use a guarantor.

A guarantor is somebody who puts up their own property as the security on your loan. This means you don’t have to raise a deposit, plus you can avoid paying LMI. However, you place your guarantor at risk if you default on your loan repayments.

Because of this, most guarantors are usually the parents of the borrower. Speak to a professional to ensure everybody knows about the risks involved with a guarantor home loan.

How Can I Save a Deposit?

Let’s finish up with some quick tips for those who want to start saving for a deposit:

  • Work out how much you need to save and make that your goal. Create milestones on the way to that end goal so you can measure your progress.
  • Figure out how much you can save each week, which should give you a general time frame for reaching your goal.
  • Increase the amount you save over time, especially if your income increases.

What to do next

We’ve covered what you need to know about raising a deposit. Now, we recommend that you take the following steps:

  • Use our calculator to work out how much you could borrow with different deposit amounts.
  • Live chat with one of our home loan brokers.

This information is general in nature and you should always seek professional advice when making financial decisions.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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