It’s one of the biggest dilemmas facing a first-time home buyer.
How much deposit do I need before I can get finance to purchase a property?
And do I need to wait until I have 20% of the purchase price saved or am should I buy with the bare minimum needed, even if it means I’ll wear the extra cost of lenders mortgage insurance (which can cost multiple $1,000s)?
With property prices in some parts of Australia growing at a heady pace in 2015, many prospective first home buyers may feel frustrated.
No quicker have they saved another lump of deposit money, the prices of their target homes may have moved out of reach again.
Should you therefore strive to get into the market even with the most meagre of savings?
REA consulted a broad range of property finance experts and the general view is bigger is better however there are always exceptions to this rule.
Here are our findings:
Kaia Hunter of Mortgage Choice says a minimum 5% deposit plus costs is usually required. The costs associated with purchasing a residential property – including stamp duty and legal fees – are usually about 5% of the purchase price.
If a property is $500,000 to buy, budget on needing at least $50,000 in your piggy bank ($25,000 deposit savings + $25,000 for purchase costs).
“However there are other options for first-home buyers like a guarantor loan or perhaps the use of gifted funds, which could mean a first-home buyer could purchase with no deposit at all,” Hunter says.
“Guarantor loans are a popular option and I do lots of these types of loans for first home buyers (and) in some cases I have also consolidated small amounts of credit cards and/or personal loans into a guarantor loan to alleviate these repayments each month, making it cheaper for the client.”
Mortgage Broker Margaret Wilcock of Mortgage says it is impossible to give a definitive answer as each lender has its own lending criteria and requirements.
“Each bank has different policy around the deposit requirement so it’s best to speak with a broker that knows each bank’s policies,” she says.
“Some require that it is genuine savings, others have a non-genuine savings policy but the mortgage insurance is often higher.”
Many lenders will let you borrow up to 95% of your home’s value however the bigger the deposit, the better, says Michelle McKinnon of Aussie.
“There are no hard and fast rules around how much deposit a first-home buyer needs to have … however while not required for owner occupiers, 20% is seen as the ‘ideal’ deposit for a few reasons,” McKinnon reports.
“If you borrow more than 80% or more of your home’s value you will be asked to pay lenders mortgage insurance (LMI).
“It involves paying a one-off premium when you take out a home loan so the bigger your deposit, the less you pay in LMI.
“You may be able to add LMI to your loan, which lets you pay it off over time instead of having to pay it up front when you take out your home loan.”
Daniel Cohen, Co-founder and Director of First Home Buyers Australia agrees that while it is possible to start approaching lenders with only a 5% deposit plus costs saved, it is preferable to wait until you have more saved dollars amassed.
“We still think it’s better to save for a 20% deposit,” Cohen says.
“If you only get a 5% deposit not only do you have to pay for expensive LMI but you would also be at greater risk of defaulting on home loan repayments if a person was to lose their income due to unemployment or medical reasons.
“And the banks will have less ground to be flexible with your borrowing arrangements.
“The extra saving time allows you to do more homework on what property you want and negotiate a better home loan deal.”
Wilcock says if a first-home buyer can wait to save a bigger deposit they will save on mortgage insurance, but what they should consider is the time it takes them to save.
“What they save in mortgage insurance they may have paid out in more rent or house prices may have gone up, so may not have put them in a better position,” Wilcock says. “It would depend on the individual and their capacity to save.”
But Hunter is adamant first-home buyers are not better off saving any longer than the minimum requirement of today’s lending market.
“I’d say no, save what you need to save as a minimum and then look at purchasing as soon as you’re able to otherwise you could end up ‘chasing the market’ where you may take an extra 6-12 months to save however property prices may correspondingly increase so you end up right where you were initially.
“I like to look at LMI as a cost of ‘doing business’. If it means you need to pay this but you end up in your property sooner then I think it’s worth it as there’s every chance you will recoup this in capital growth of your property sooner rather than later too.”
Patrick Nolan, Head of Home Loans at ME says stop paying rent sooner than later versus long-term cost and interest payment savings.
“The advantage of a smaller deposit is you get into your own your home sooner,” Nolan says.
“It’s up to the buyer. If you’re eager to get your foot in the door of your first home then saving the minimum will ensure you’re able to do that (but) the bigger the deposit, the lower the LMI premium will be so if you don’t want to pay more than you have to, reaching the desirable 20% deposit will reward you with a smaller loan with lower repayments and greater equity in your home.”