A deposit shows the banks that you have the capacity to save money and pay off your debt. Pretty simple right? It also provides the banks with security and helps them to register the level of risk you present. If you have saved a significant deposit towards your home, you are proving to the banks that:
Typically, in Australia, homeowners save a 20% deposit and the banks kick in the rest. Sounds great right? The reality is that not all Australians can save a 20% deposit upfront. As let’s be honest, 20% can be a huge sum of money.
This is the ultimate scenario. You save and put forward 20% of the purchase price (plus duties and fees) upfront, avoid Lenders Mortgage Insurance(LMI) and your chosen lender kicks in the remaining 80%. Presto.
Depending on the deposit you have saved, you can apply for a low deposit home loan. Note that the less deposit you have, the riskier you will be to the banks and the higher the LMI you will need to pay.
If you have some deposit saved but not quite the entire 20%, some banks will accept a 10% - 20% deposit. You will be deemed a higher risk borrower in this case and may come under more scrutiny in regard to your ability to make repayments. It is important to note that a Loan to Value Ratio (LVR) higher than 80% (meaning you are borrowing more than 80% of the value of your home) means you will be required to pay LMI . This will be added to your regular monthly repayments.
Lending criteria is getting tighter, however some banks may still accept a deposit of just 5%. This is generally the lowest deposit figure accepted by Australian lenders. There is no such thing as a 0% deposit. As with a 10% - 20% loan, you will undergo increased scrutiny and will be required to meet specific lending criteria as well as being required to pay LMI.
The benefit of low deposit home loans is that you can get into the home of your dreams without saving a 20% deposit, which can take many years.
It minimizes the amount of money you need to pay upfront.
The major drawback is that you will have to pay LMI. This insurance payment will be added to your monthly repayments, which means you will end up paying more over the life of your loan.
Having a lower deposit home loan also means you start off with less equity in your home. You will need to pay off your principal and interest in order to access any equity in your property for further investments.
In order to avoid paying LMI, you will need to save the 20% deposit or have a guarantor for your loan. Otherwise, its head down and start saving!
There are no 0% deposit home loans in Australia. The lowest deposit banks will consider is 5%. If you have a zero deposit, the greatest chance of owning your own home is through a guarantor home loan. You can read more about Guarantor Home Loans here.
Funnel your savings into paying off your high interest debts such as credit cards, store cards and any personal loans. This will also be viewed favourably when applying for your loan.
Set a savings plan and have it visible in your home. Break it down into smaller chunks so you can see the progress you are making towards your bigger goal.
Saving for a home loan deposit does mean sacrifice. Look at what you spend your money on each week and see where you can cut back. Take your lunch to work instead of take-out. Switch a regular Sunday brunch to a walk along the beach. Instead of dining out 3 times a month, cut it back to once a month. Small savings make a big difference.
It is worthwhile to make initial enquiries to see what percentage deposit you are saving for. Enquire as to whether a 5% deposit is an option for you based on your current situation.
At Organic Home Loans, we are here to assist you in making the process of securing your home loan and finalising your deposit a straightforward one. We cut through the red tape and provide you with the facts. The more informed you are about banks’ expectations and requirements, the greater your chance of a successful outcome.
Let Organic Home Loans help you understand your deposit requirements and get your very first home loan right.
