Cost of Buying A House – Deposit

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Deposit – how much do I need to buy a house?

Despite the changes in home loan availability, you may still be able to buy a house with very little deposit at all, but it is important to understand the costs involved in doing so. Most people save a 20% deposit because with a 20% deposit, you can completely avoid having to pay any lender’s mortgage insurance (LMI).

Up to 95% Home Loans

Provided you can make the payments, you may be able finance up to 95% of the property value from a lender. Some may then offer to add the mortgage insurance costs to your loan as well, therefore lending you up to 97% of the property value. It is not unusual for first-home buyers to have less than a 20% deposit, and investors might simply want to minimise deposit and maximise gearing benefits.

100% Home Loans or No-Deposit Home Loans

Important note: Genuine no deposit, 100% home loans which cover the full purchase price of the property are unavailable in the current economic climate.If you have only a small or no deposit, talk to your mortgage broker about your home loan options, including setting up a good budget to assist you to build the required savings.

Who do Low Deposit Home Loans suit?

Lenders may apply a slightly higher debt servicing ratio (the level of debt you’re carrying compared to your income) to low-deposit home loans. They are ideal for people with a good income and credit history who, for different reasons, maybe pay high rent and have not been able to save for a good-sized deposit. Low deposit home loans are great for first-home buyers because they help people enter the housing market before prices rise beyond their reach, especially when house prices have been rising faster than the average person’s ability to save. They are also often attractive to investors wanting to maximise their gearing for taxation purposes or income return.

Do I pay a higher interest rate on Low Deposit Loans?

Maybe. Different home loan products have different pricing structures, so you will need to find the one which works best for you. Depending on which lender and loan you choose, the interest rate you pay may even be lower than the lender’s standard variable rate. You will however almost definitely have to pay lenders’ mortgage insurance.

Pros and Cons of Low Deposit Home Loans

Pros

You can buy property sooner.
The loans often come with features such as additional repayments and redraw facilities.
You may be able to use several sources for your deposit.

Cons

Low deposit home loans may have stricter lending criteria, and approval can be harder. You may also be restricted to certain types of properties, and certain locations (lower risk profile properties).
In essence, you’re borrowing more money, so you’ll end up paying more interest in the long term.
You may also have to pay either a higher interest rate or pay more mortgage insurance.
It is important to be aware that, if the real estate market drops, the risks you face are potentially higher than everybody else, in terms of affordability and the amount of equity you have in your home. Realistically though, lenders have no interest in their borrowers getting into “negative equity” positions. In other words, a borrower’s house would be worth less than their loan and the temptation for the borrower to just hand over the keys and walk away would be high in a negative-equity situation. That would clearly not be the objective of any lender.

Other deposit sources

If you are looking to purchase and only have a small deposit, there are some other options available. Talk to your mortgage broker about your options, which may include family equity or providing the funds for the deposit from a range of sources.