How much deposit do I really need?

Author: ME

Published at: 6/21/2016 3:29:23 PM


The Truth About First Home Deposits


If it’s proving tough to save a 20 per cent deposit, rest assured, you can set the wheels in motion with a lot less.


You’ve been saving hard to build a deposit for your first home, right? But reaching that 20 per cent benchmark is proving challenging.


Sometimes the difficulty in growing a big deposit for your first home has nothing to do with your determination. Even with the strictest savings plan in place, rising property prices can continually push the goal posts further out.


The thing is, if you’ve managed to grow a first home deposit of, say, 10 per cent or more, you may be a lot closer to your goal than you realise. Here’s why.


Borrow up to 95% of your home’s value


While 20 per cent is regarded as the ideal deposit (more on this shortly), many lenders will let you borrow up to 95 per cent of your home’s value. So you may only need a deposit of just 5 per cent.


However there are strings attached.


First up, buying a home comes with a bunch of upfront costs. Legal fees, home and contents insurance, moving costs – it all adds up. The big cash drain is often stamp duty. It’s based on the price you pay for your home (there’s a good incentive to negotiate hard on price), and it’s a fair bet you could be looking at duty costing several thousand dollars. 


So while you could scrape by with a deposit of 5 per cent, realistically it pays to have a bit more cash up your sleeve to cover those buying costs.


Lenders mortgage insurance


The other issue to consider when you have a smaller deposit is the impact of lenders mortgage insurance (LMI). This applies if you borrow more than 80 per cent of your home’s value and unlike other types of insurance, it protects the lender – not you – if you can’t keep up the loan repayments.


You don’t have to shop around for LMI, your lender will let you know what sort of premium you’re looking at. However the bigger your deposit, the lower the LMI premium will be. You may be able to add the cost of LMI to your home loan and pay it off gradually. 


The upshot is that if you want to get into your first home sooner, there are options available to get you over the line even without a 20 per cent deposit.


That said, you may feel like you’re on the home stretch and happy to keep going with your savings plan to reach that highly desirable 20 per cent target. If that sounds like you, the reward will be a smaller loan with lower repayments and greater equity in your home.