Do you really need a 20% deposit?
Not necessarily.
A 20% deposit is often considered a strong target because it reduces the amount you need to borrow and can help you avoid lenders mortgage insurance (LMI).
For example, on a $600,000 property, a 20% deposit would be $120,000, leaving a loan of $480,000 before considering other purchasing costs.
However, some lenders may accept significantly smaller deposits depending on your circumstances and the type of loan. Moneysmart notes that some lenders may accept deposits as low as 5%.
What happens if your deposit is below 20%?
When you borrow more than 80% of a property’s value, you may need to pay lenders mortgage insurance, commonly known as LMI.
LMI protects the lender rather than the borrower if the borrower cannot repay the loan. It can be paid at settlement or, depending on the lender and loan, added to the amount borrowed.
Paying LMI isn’t automatically a reason not to purchase with a smaller deposit. The important question is whether the overall lending strategy is appropriate for your circumstances.
Understanding your Loan-to-Value Ratio
You’ll often hear brokers and lenders refer to your loan-to-value ratio, or LVR.
Your LVR compares the amount you’re borrowing with the value of the property.
For example, if a property is valued at $600,000 and you borrow $450,000, your LVR is 75%. Generally, a larger deposit produces a lower LVR.
LVR can influence lender requirements, loan options and whether LMI applies.
Don’t forget the other costs of buying
Your deposit isn’t necessarily the only money you’ll need.
Depending on your circumstances and location, purchasing costs can include stamp duty, conveyancing or legal fees, building and pest inspections, loan-related costs and other expenses associated with purchasing and moving into a property.
Moneysmart therefore recommends considering both your deposit and the costs of buying the property when establishing your savings target.
Could you buy with a smaller deposit?
For some buyers, potentially.
Government programs may provide another pathway into home ownership for eligible applicants. The Australian Government 5% Deposit Scheme can assist eligible buyers to purchase with a smaller deposit without paying LMI, while Help to Buy provides a separate shared-equity pathway with a minimum 2% deposit for eligible applicants.
These schemes have eligibility criteria and conditions, so they won’t be appropriate or available to everyone.
Bigger deposit or buy sooner?
There isn’t one deposit amount that’s right for every buyer.
Saving a larger deposit may reduce the amount you need to borrow, potentially lower your repayments and help avoid costs such as LMI. On the other hand, waiting until you’ve accumulated a 20% deposit could mean delaying your purchase.
The right approach depends on your income, savings, borrowing capacity, property goals and overall financial circumstances.
Find out where you stand
Before assuming you need a 20% deposit, it can be useful to understand your borrowing capacity and the lending options available to you.
At Iron Advantage, we can review your circumstances, compare suitable lenders and help you understand the deposit requirements and finance options available for your property goals.
