As Australian property prices have come down, many people are starting to look seriously at buying a home. One of the key issues that home buyers need to contend with is whether they have sufficient deposit to qualify for a home loan. Most people understand that they need to have a reasonable income to be able to afford loan repayments, but few consider the required home loan deposit.
How much deposit is enough?
Most experts would recommend that you need to put together a deposit of at least 20% in order to provide yourself with a reasonable equity in your home and protect yourself against negative equity which is a real epidemic today for First Home Buyers who had made their purchases over the past 4 years and had borrowed over 90% when making their purchase.
However when it comes to finding lenders who will lend you with a relatively small deposit, there are a number of options available to home buyers who have at least 5% deposit plus costs.
We still receive daily home loan inquiries from people keen to buy with no deposit or a deposit of $3,000 – this is not a possibility and will unlikely to become an option in the near future. Buyers who only have a couple of thousand saved can only make a purchase through developers who offer their own finance to people who agree to buy one of their house and land packages. Such purchases are possible but you will need to agree to buy in the available areas and will not be able to purchase an existing property.
Buyers who have no deposit or are looking to buy with no deposit and then consolidate existing debts into a new mortgage – are chasing a dream.
Buyers who would like to buy an apartment off the plan, as is becoming rather popular now, may need to have a deposit of 10%. Many developers need to reach a certain level of pre-sales before being able to qualify for construction finance to fund the building. These developers will generally want to receive at least 10% deposit form purchasers.
Furthermore, if you are looking to buy off-the-plan in a mixed use development (ie. shops or offices downstairs and apartments above), you may need to have a deposit of 30%. This is because the title that is created in a mixed use development is not residential and many banks will lend on it a maximum of 70%.
Given that off-the-plan purchases are more complicated it is wise to sign any contract subject to finance and approach your preferred lender for pre-approval before committing fully to the purchase. Make sure that your lender sees the property contract and confirms how much deposit will be required.
Do I need to pay Mortgage Insurance?
Generally speaking if you borrow in excess of 80% of the purchase price, Lenders Mortgage Insurance will be payable. This will be an additional cost that the borrower will need to cover if they have less than 20% deposit.
Low Doc and Bad Credit Borrowers
Low doc borrowers and bad credit borrowers will not be able to borrow 95% of the purchase price. These purchasers will need to have a larger deposit.
These borrowers are generally required to have at least 20% deposit. However some lenders do advertise home loans with a deposit of only 10%-15%. The buyer ability to qualify for such loans will depend on the extent of their bad credit as well as on their ability to provide some proof of income.