One of the biggest challenges for families looking to buy a home is coming up with the deposit. In fact, the sometimes seemingly impossible task of saving a massive deposit can put people off even attempting to enter the property market or buying their next home. The thought of this breaks my heart. Not being able to save a large deposit shouldn’t prevent you from achieving your home ownership dreams. The first step is to know where you stand, by understanding how much deposit the banks actually want.
How much deposit do the banks need for a home loan
Most banks and lenders prefer a 20% deposit. However, saving a 20% deposit isn’t realistic for many of my clients, because they have families to support and are often paying rent or mortgage repayments for their current home. The good news is that there are some lenders that will accept as little as 5% deposit. So, if you’re looking at paying 20% deposit, it’s 20% of the cost of the property. If you’re purchasing a property for $500,000, a 20% deposit would be $100,000. If you only want to pay 5% deposit for that $500,000 property, your deposit would be $25,000. Saving $25,000 is more realistic for many families.
Lenders Mortgage Insurance
Be mindful, that for deposits under 20% Lenders Mortgage Insurance (LMI) will apply. LMI provides protection to the lender in case you default on your home loan. It’s a one-off charge that usually gets included in your loan amount. Check out my post explaining LMI for more information.
Other upfront costs
It’s important to note that the deposit isn’t the only upfront cost you will need to prepare for. There are other costs associated with purchasing a property such as conveyancing and in some cases Stamp Duty. If you’re a first home owner you may be eligible for various concessions, including a concession on Stamp Duty Our Property Buying Costs Calculator can help you figure out how much you need to put aside for upfront costs in addition to your deposit.
What if you don’t have any deposit but you still want to purchase a property now?
If you don’t have any or enough deposit to secure a home loan, there’s still hope. There are a few options that may be available to you.
Using Equity to buy your next home
If you already have a mortgage or own your property outright, you may be able to use the equity in your home to help you buy another property. Equity is the difference between what your home is worth today and what you still owe on your mortgage.
A Guarantor Loan is when someone, usually a close relative such as a parent uses the equity in their property to help you secure yours. Having a guarantor on your loan often means that you won’t need a deposit at all. Guarantor Loans may also help you to avoid paying Lenders Mortgage Insurance. This option isn’t right for everyone. There are some risks involved for the Guarantor. It’s smart to speak to a professional before applying for this type of loan.
The First Home Owner Grant
If you’re buying your first home, you may be eligible for the First Home Owner Grant (FHOG) to put towards your deposit. The FHOG a one-off payment of up to $10,000. (Up to $20,000 in some Regional Areas which the government has specifically selected). The government pays the FHOG to first home owners that meet certain eligibility criteria. The eligibility criteria and the amount paid varies from state to state.
No-deposit home loans
You may have heard or seen ‘no-deposit’ or ‘$1K and you’re on your way’ home loans advertised. This can be a risky option. I recommend proceeding with caution. Check out my video exposing the truth about ‘no-deposit’ home loans. If you’re looking at buying a home my advice is to save as much deposit as possible based on your circumstances. Having a higher deposit behind you may give you more choice and perhaps even help you secure a lower rate or a better deal when you apply for a loan.
Be realistic about how much you can save and remember to factor in those additional purchasing costs. If you’d like some help assessing how much deposit you’ll need to buy a home please book in your free Home Loan Strategy Consultation, I’m happy to help.