How much deposit do you really need to buy your new first home?
IT’S one of the biggest dilemmas facing a firsttime homebuyer.
How much deposit do I need before I can get finance to purchase a property?
And do I need to wait until I have 20% of the purchase price saved or should I buy with the bare minimum needed – even if it means I’ll wear the extra cost of lenders mortgage insurance?
With property prices in some parts of Australia growing at a heady pace in 2015, many prospective first-home buyers may feel frustrated.
No quicker have they saved another lump of deposit money, the prices of their target homes may have moved out of reach again.
Should you therefore strive to get into the market even with the most meagre of savings?
From consultation with a broad range of property finance experts, the general view is bigger is better, however there are always exceptions to this rule.
How much deposit does a first-home buyer need before banks will talk to them?
Kaia Hunter of Mortgage Choice says a minimum 5% deposit plus costs is usually required.
The costs associated with purchasing a residential property – including stamp duty and legal fees – are usually about 5% of the purchase price.
If a property is $500,000 to buy, budget on needing at least $50,000 in your piggy bank ($25,000 deposit savings + $25,000 for purchase costs).
“However, there are other options for firsthome buyers like a guarantor loan or perhaps the use of gifted funds, which could mean a first-home buyer could purchase with no deposit at all,” Ms Hunter says.
Mortgage broker Margaret Wilcock of Mortgage 500 says each bank has different policy around the deposit requirement “so it’s best to speak with a broker that knows each bank’s policies”.
“Some require that it is genuine savings, others have a non-genuine savings policy but the mortgage insurance is often higher,” she said.
Is a first-home buyer better off waiting longer to buy if it means they can save a bigger deposit?
Many lenders will let you borrow up to 95% of your home’s value however the bigger the deposit, the better, says Michelle McKinnon of Aussie.
“There are no hard and fast rules around how much deposit a first-home buyer needs to have … however, while not required for owner-occupiers, 20% is seen as the ‘ideal’ deposit for a few reasons,” Ms McKinnon reports.
“If you borrow more than 80% or more of your home’s value you will be asked to pay lenders mortgage insurance (LMI).
“It involves paying a one-off premium when you take out a home loan so the bigger your deposit, the less you pay in LMI.”
Daniel Cohen, co-founder and director of First Home Buyers Australia, agrees that while it is possible to start approaching lenders with only a 5% deposit plus costs saved, it is preferable to wait until you have more saved dollars amassed. “If you only get a 5% deposit not only do you have to pay for expensive LMI but you would also be at greater risk of defaulting on home loan repayments if a person was to lose their income due to unemployment or medical reasons,” he said.