Before you can move into the dream home you have found, you first must look into how to gather your down payment or deposit funds. This article will give more insight as to why deposits are so necessary when obtaining a loan and what kind of impact deposit amounts have on securing mortgages.
Mortgage deposit explained
A mortgage deposit in Australia is the initial amount of money a home buyer contributes towards the purchase price of a property. This deposit serves as the buyer’s equity in the home and is a crucial component of securing a home loan.
Acquiring a new abode requires financial preparation, usually in the form of an initial deposit payment. This amount typically ranges from five to 20 per cent of the total mortgage; however, if you have extra funds available, you can always opt for an even larger down payment.
The deposit amount matters
To be eligible for a home loan, lenders require you to provide a minimum deposit. As the deposit is such an integral part of the process, these loans are often referred to as “deposit paid mortgages”. If your parents or relatives offer to contribute towards this amount and it’s given in the form of a gift, then you’ll need to produce a valid gift letter which will serve as proof when submitting your application.
A larger initial deposit can help to lower your monthly repayment. You may also be able to negotiate better interest rates if you can manage a higher deposit. Additionally, you must secure the finances necessary to cover all solicitor fees, stamp duty, bank fees and any other expenses involved in your purchase.
Key features of mortgage deposits
- Typical amount: Most lenders in Australia require a minimum deposit of 20% of the property’s value to avoid Lender’s Mortgage Insurance (LMI).
- Minimum requirements: Many lenders accept smaller deposits, with some allowing as little as 5% of the property’s value.
- LMI implications: Deposits less than 20% usually require the borrower to pay Lender’s Mortgage Insurance, which protects the lender against default.
- Deposit size impact: Larger deposits can lead to more favorable loan terms, including lower interest rates and increased borrowing power.
It’s essential to remember that when you’re taking out a deposit paid mortgage, the amount of money required up front will not be included in your regular loan repayments. Therefore, it is important to have ready access to a payment for your initial deposit before applying for this type of mortgage.
Deposit amounts and property values
The required deposit amount varies based on the property’s value. Here’s an example:
| Property Value | 20% Deposit (No LMI) | 5% Deposit (With LMI) |
|---|---|---|
| $500,000 | $100,000 | $25,000 |
| $600,000 | $120,000 | $30,000 |
| $700,000 | $140,000 | $35,000 |
By contrast, the more money you put down as a deposit, the smaller loan amount you need to take out. In this way, your deposit essentially contributes towards your mortgage. When you are able to commit a larger portion of the purchase price, lenders become more comfortable with approving your mortgage application since their risk is reduced.
Alternate deposit options
- Government schemes: Programs like the First Home Guarantee (FHBG) and Regional First Home Buyer Guarantee (RFHBG) allow eligible buyers to purchase a home with as little as a 5% deposit without paying LMI.
- Family home guarantee: This scheme enables eligible single parents to buy a home with a 2% deposit and avoid LMI.
- Equity use: Existing homeowners may be able to use equity in their current property as a deposit for a new purchase.
It’s important to note that while smaller deposits are possible, saving a larger deposit can result in significant benefits over the life of the loan, including lower interest payments and potentially better loan terms. There are also options available for first home buyers facing poor credit issues.
