Guidance on Determining the Deposit Required (Broker Explains Options)
When preparing to purchase a home, one of the most critical steps is determining the deposit required. This process can vary depending on your financial situation, the type of property, and the loan products available. Consulting with a mortgage broker can help you navigate these options and make an informed decision. Here’s what you need to know:
1. Understanding the Basics of Deposit Requirements
The deposit is the upfront amount you contribute toward the purchase of your property. Most lenders require a deposit of 10% to 20% of the property’s purchase price. For example:
A 10% deposit on a $600,000 property is $60,000.
A 20% deposit on the same property is $120,000.
The size of your deposit influences the type of loan you can access, your borrowing capacity, and whether you’ll need to pay additional costs like Lender’s Mortgage Insurance (LMI).
2. Exploring Options with a Broker
A mortgage broker can help you explore different deposit options and guide you through the process. Here’s how they can assist:
Assess Your Financial Position: Brokers evaluate your income, expenses, savings, and credit history to determine what deposit size is feasible for you.
Explain Low Deposit Loans: If saving for a 20% deposit feels overwhelming, your broker can explain options for loans requiring as little as a 5% deposit.
Lender’s Mortgage Insurance (LMI): They’ll clarify when LMI applies and help you decide if it’s worth pursuing a smaller deposit.
First Home Buyer Incentives: Brokers can identify government schemes such as the First Home Loan Deposit Scheme (FHLDS) that allow eligible buyers to purchase with as little as a 5% deposit without paying LMI.
3. Factors Influencing Deposit Size
The required deposit size can vary depending on:
Property Value: Higher-value properties typically require a larger deposit.
Loan-to-Value Ratio (LVR): Lenders prefer an LVR of 80% or lower, meaning a 20% deposit. A higher LVR may incur additional costs.
Loan Type: Investment loans or specialized loans may require larger deposits.
Credit Score: A strong credit score can increase your borrowing power, potentially allowing for a lower deposit.
4. Benefits of a Larger Deposit
While saving for a larger deposit can take longer, it offers several advantages:
Lower Loan Amount: A larger deposit reduces the total amount you need to borrow, leading to smaller monthly repayments.
Avoiding LMI: Deposits of 20% or more generally eliminate the need for LMI.
Better Interest Rates: Lenders often offer more competitive rates to borrowers with larger deposits.
5. Strategies to Build Your Deposit
Set a Savings Goal: Work with your broker to calculate the deposit size that aligns with your budget and target property price.
Automate Savings: Use a dedicated savings account with automatic transfers.
Leverage Superannuation: For first-home buyers, the First Home Super Saver Scheme (FHSSS) allows you to use super contributions toward your deposit.
Reduce Debt: Lowering your existing debts can free up more money for savings.
6. Get Tailored Advice
Every homebuyer’s situation is unique. Your broker can:
Help you understand how much deposit you’ll need for your specific circumstances.
Provide personalized advice based on your financial goals and property preferences.
Liaise with lenders to find the most suitable loan options for you.