“How much do you need for a house deposit?”
This is one of the most frequently asked questions, we get from first home buyers.
And if you are struggling to answer this yourself, don’t stress! You are not alone.
You’ve probably seen offers like house and land packages with 5% deposit, low deposit finance options from lenders and the First Home Buyers Grant from governments, just to name a few. In fact there are so many options, it is easy to understand why people get confused.
So we are going to remove the confusion for you. Because, there is only one answer to this question, in our opinion.
And that is for you to save a minimum deposit of 20% of the purchase price, plus enough for fees, to buy your first home. There are many reasons we give for this and here’s our top 10 for you.
10 Reasons to save a minimum 20% deposit, before buying your first home.
1. Better chance of home loan approval
Your going to need a home loan to buy the property and banks consider loans high risk where you borrow more than 80% of the property value. If you put a minimum of 20% deposit into the the property at settlement, you will be a lower risk to any lender. This increases your loan’s chances of being approved
2. No Lenders Mortgage Insurance (LMI)
You only pay LMI, when you borrow more than 80% of the property value. Because LMI can cost thousands and has no benefit to you (it only protects the bank), we advise against paying it. This is done by paying a minimum 20% deposit, saving you thousands.
3. More lenders to choose from
Once again, the 80% loan to value ratio (LVR) you get from your 20% deposit, makes you a lower risk borrower. Therefore, more lenders will want you as a customer and gives you more options to choose from. So how much do you need for a house deposit for more lenders? Once gain 20% will do it.
4. Better Deals
With more choice of lenders you also get better deals as they will want to compete for you business. Particularly in this current market where lower risk borrowers are in huge demand. How much do you need for a house deposit for this – 20% minimum
5. Pay less interest
Compared to lower deposit loans, you will pay less interest over the life of the loan with a 20% deposit. To give you an idea, paying $50,000 more in loan deposit will save you $60,000 in interest at 4% over 30 years.
6. Lower monthly repayments
The more you pay upfront, the less you have to borrow and the lower your monthly repayments. Low deposit options sound great, but the bigger monthly repayments can create cash-flow problems and cause mortgage stress down the track.
7. Pay loan of faster
The lower interest and monthly repayments you can get with your 20% deposit, can help you to repay your loan off faster. This is because you will be able to service the loan easier when compared to the higher minimum repayments you get with smaller deposit loans.
8. You can’t rely on grants
First home owner grants are periodic depending on government policy and only paid weeks after settlement. Vendors need their money on settlement day. Our advice is to keep any grants out of the deposit and use them as savings. New homes have expenses you won’t see coming and having savings in the bank post settlement is a sound financial strategy.
9. More buying power and choice
Relying on government grants for deposit means you can only buy new properties and under a certain price. This may restrict where you can live and what you can buy. Smaller deposits reduces available lenders, which could also restrict what you can buy. A 20% deposit gives you more control, more flexibility and options. Plus it gives you more negotiating power with lenders and vendors.
10. Stronger financial position
Buying your first home is a big financial commitment and something that you need to be prepared for. The financial discipline required to save the 20% deposit will require planning, commitment and sacrifice. Consider it a training program you need to go through, to get in the strongest financial position needed to buy a house.
Hope this has helped
I hope this has helped you to understand the benefits of saving the 20% deposit over smaller deposit options. It might take you longer to get into the property, but if you are currently living with your parents make the most of it. Because you will never get a better opportunity to save money! And remember, the less you pay upfront when you buy a property the more you have to pay in time, money and opportunity later.
If you still have questions about how much do you need for a house deposit. You can book a free 20 minute phone consult, by clicking button below, or message us via the Contact Us page. We look forward to hearing from you.