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Do you really need a 20% deposit?

By Ellana Christakakis
In Budgeting, First Home Buyer, Home Loans, Real Estate

We know that the majority of first home buyers assume they need a 20% deposit before even thinking of applying for a loan. Though now with the First Home Loan Deposit Scheme (FHLDS) implemented by the Federal Government, the talk of 5% deposits is becoming more common. So how much do you really need to save?

Where 20% started

It’s pretty well known that most lenders generally want to limit their exposure of Loan to Value Ratio (LVR) to 80%. This means that they would expect their loan to you to only cover 80% of the total purchase price of the property, leaving the remainder for you to have in the bank. This means it’s less risky for the banks, if property prices go down that they haven’t loaned an amount more than the projected total value of the property. Don’t fret though, property prices are looking very stable at the moment.

If you don’t have 20%

If you don’t have a large deposit saved in the bank, some lenders may accept a loan application up to 95% of the purchase price. Some ways they can do this is by giving you the option of taking out Lenders Mortgage Insurance (LMI), which will protect the bank if you cannot meet repayments. This doesn’t protect you.

The benefit of the FHLDS is that the government has pledged to cover LMI for 10,000 eligible Australians each year. This can get some people onto the property ladder with a 5% deposit, and potentially save them thousands each year by not having to pay the lender LMI.

Another option for anyone that may not have a 20% deposit in the bank, is to get a family guarantee. This will allow a family member that owns their own home, to use the equity they have in their home as a security for your loan, which gives the lender the extra protection they’re after. This can put your family member at risk though and is only recommended after assessing the individual situation by a lender or broker.

Why purchasing with a smaller deposit can be a good thing

While it makes sense to wait until you have as big a deposit as possible until you purchase your home, sometimes it can make sense to purchase when you’re not quite at the 20% mark yet.

This could be in situations where saving the deposit isn’t realistic, or even in areas where the market is rising at a rapid rate. If property prices rise quickly, then it could take longer to save a deposit, and end up costing potential buyers more in the long run as they lose out on quickly building equity.

If you’re a first home buyer, one of our experienced brokers can assist you with any questions you may have on deposit amounts, and to see if you could be eligible for the FHLDS.

Get in contact today!

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