How much do you need for a property deposit?

Buying your first home is an exciting but daunting process, especially when it comes to finances. One of the most important things you need to consider is how much you need for a property deposit.?

In Australia, the standard deposit for a home loan is typically 20% of the purchase price. This means that if you’re buying a property for $500,000, you’ll need to save up $100,000 for the deposit.

But what happens if you don't have a 20% deposit??

The good news is that you still have options, including paying lender’s mortgage insurance (LMI).?

What’s lender’s mortgage insurance?

Lender's Mortgage Insurance is a one-off fee that some lenders charge when you borrow more than 80% of a property’s value (i.e. your deposit is less than 20%).?

It’s designed to protect the lender in case you subsequently default on your loan repayments and the property needs to be sold to recover the outstanding debt.?

The cost of LMI varies depending on the size of the deposit, the amount borrowed, and the lender's requirements. It can be paid upfront or added to your home loan amount – though, this means you will pay interest on the LMI over the life of the loan, increasing its cost.?

While LMI can be a significant added expense, it can help you get onto the property ladder sooner than it would otherwise take with a larger deposit.?

Bigger deposit v smaller deposit

There are pros and cons to different deposit sizes. A smaller deposit can mean that you can get into the property market sooner, but it also means that you will have to pay LMI, which can be an added expense.?

On the other hand, a larger deposit can mean that you can avoid LMI and reduce your loan repayments. However, it can take longer to save a larger deposit, which may mean waiting longer before you can purchase your first property.

How to avoid LMI?

If you're struggling to save a large deposit, there are several options available to you to avoid paying LMI.

For instance, you could take advantage of the federal government’s Home Guarantee Scheme (HGS), depending on your circumstances.?

Under the scheme, the government provides a guarantee which allows eligible homebuyers purchase a home with a small deposit while avoiding LMI.?

?Some professions, like doctors and dentists, may also be eligible for a no-LMI loan. These loans are offered by some lenders as a way of attracting high-income earners and can be a good option if you work in one of these fields.

Alternatively, you might have a family member who’s willing to act as a guarantor. A guarantor is someone who agrees to guarantee part of your loan, usually by using their own property as security. This reduces the amount of risk to the lender, allowing you to borrow more or avoid paying LMI altogether.

However, it can be risky for the guarantor, as they’re liable for the loan if you default. Also, their borrowing capacity may be reduced during the guarantee period.

The Numbers

Investment 1

For investments, this is the following that you have to consider while arranging your deposit.

• You have to consider your deposit itself which means, say we are buying $1M property. The deposit is about 10%, which is $100,000.
• 2nd, assess, now if you're not paying a 20% deposit, the bank will charge you a lender's mortgage insurance which on $100,000 approximately will be about $18,000 to $21,000.Now, if you're paying 100,000 in deposit, you're still short by 100,000 for a $1 M dollar property in order to safeguard a 20% deposit. Which means the bank will go to a third party subsidiary to help you lend this amount and you pay a lender's mortgage insurance which safeguards the bank, not yourself which means add about 20K approximately on it.
• Then, the next cost is stamp duty on a $1M worth property. Add about $40,000.We reached about 160 already.
• If you are engaging a buyer's agent, add about $20,000,

We are talking $180,000.

• And lastly, add building and pest, legal, minor repairs here and there about $5,000.

So what you need is about $185,000 to begin with.

Investment 1

Alternatively, if you're buying a 500K property, what you need is

• $50,000 in deposit,
• $10,000 in lenders mortgage insurance. If you can capitalize in the deposit, that's good.So add about 8% deposit and 2% LMI that's a bare minimum what you would need but either way it's $50k plus $10k,
• $60k, stamp duty of about $20,000 at 4% approximately.

We're talking $80,000 and

• Add legals, building and pest and minor costs and they're about $5,000, $85,000.
• And a buyers agency of $15,000,

We're talking about $100,000 to begin with. So in a nutshell, what you need is a 20% deposit at a bare minimum to begin with.

Looking to buy a high-quality investment property? Auswide Buyer’s Agency can help. To discuss your options, book a free consultation with Ashish Malhotra.