Unlocking the Truth About House Deposits: More Than Just 20%

In the realm of property, the magic number often whispered is 20%. But let's face it, with skyrocketing property values, saving a 20% deposit can seem like an insurmountable mountain. And that's not all – add stamp duty and legal fees to the mix, and you're in for a challenge. But here's the scoop: not all lenders require that hefty sum. There's a world of possibilities beyond the 20% myth, and some paths even let you skip the deposit altogether!

🔍 Decoding the Deposit

Your deposit is your first payment to secure a home loan, exclusive of other property transaction costs. It's a way for lenders to assess your financial discipline and ability to save, which in turn influences the loan you qualify for and the property you can afford. A larger deposit means borrowing less, paying less interest, and potentially a faster loan payoff. On the flip side, a smaller deposit could result in higher interest rates and longer loan terms.

💡 Debunking the 20% Myth

So, do you really need 20%? The truth is, lenders accept deposits ranging from 5% to 20% (or even more) of the property's value. Different lenders have different criteria, affecting your interest rate and monthly payments. They weigh factors like your income, buyer profile, property value, and Loan-to-Value Ratio (LVR). This ratio gauges loan size against property value – lower ratio, lower risk.

First-time buyers might have less equity or investments, possibly resulting in a higher interest rate. While many prefer 20% deposits due to lower risk, other options exist for those with smaller savings.

Strategies to Achieve Less Than 20% Deposit:

1. Low Deposit Mortgage with LMI:

If 20% feels unattainable, consider a low deposit mortgage with Lenders Mortgage Insurance (LMI). This insurance safeguards lenders against defaults. It's often rolled into monthly repayments, though they'll be pricier. For example, on a $500,000 property with a $10,000 deposit, expect $15,200 in LMI.

2. First Home Guarantee (FHBG) Scheme:

Designed for first-time buyers with a 5% deposit, the FHBG scheme lets you dodge LMI. The National Housing Finance and Investment Corporation administers it, effectively guaranteeing part of your loan, helping you step onto the property ladder faster.

3. Guarantor Home Loans:

With a small deposit, a guarantor (like parents) can guarantee a part of your loan, using their property as collateral. Some lenders allow up to 105% borrowing without LMI. The guarantor needs equity, a stable income, and a good credit history.

4. Loans for Specific Industries with No LMI:

Certain professions – medical doctors, accountants, lawyers, and more – can qualify for loans without LMI. Though this can open doors to property ownership, be prepared for potential higher interest rates.

5. Family Home Guarantee (Single Parent House Deposit):

Eligible single parents can utilize this scheme to buy a home with a 2% deposit and skip LMI. Requirements include a dependent child, specific income, and property value criteria.

6. Rent-to-Buy Schemes:

Rent-to-buy schemes allow you to rent a property for a few years with an option to buy, usually without a deposit. However, these schemes are risky and lack legal protections.

💰 Saving for Different Property Prices:

Here's a glimpse of how deposits stack up for various property prices:

Property Price             5% Deposit                  10% Deposit                20% Deposit

$250K house               $12,500                       $25,000                       $50,000

$300K house               $15,000                       $30,000                       $60,000

$400K house               $20,000                       $40,000                       $80,000

$500K house               $25,000                       $50,000                       $100,000

$1M house                  $50,000                       $100,000                     $200,000

Loan percentage: 95% (5% deposit), 90% (10% deposit), 80% (20% deposit)

LMI needed? Yes (5% & 10% deposits), No (20% deposit)

📈 Is It Worth Opting for a Smaller Deposit?

The decision hinges on your personal circumstances and a balance of pros and cons. Smaller deposits come with potential downsides like higher interest rates and monthly payments. Yet, they can be your ticket to property ownership. At the end of the day, you're the compass that guides your journey to homeownership.

Adam Davis

Principal Buyers Agent

Adam Davis Buyers Agent

0419 552 092

adam@adamdavisbuyersagent.com