How much deposit do I need?
Owing a home is a dream many people have at one point or another in their live. But with all the lingo and fine print the average person has to consume it can seem more complicated that is really needs to be. Applying for a home may be important, but there are some important things you should know before entering into the market for your new home. Here are a few tips on deposits and savings to help you be better prepared for when that moment comes to sign on the dotted line.
Savings Vs Deposit
When purchasing a home, you want to ensure you have enough deposit or savings available. It’s important to understand the difference between ‘savings’ and a ‘deposit’, as they are not the same thing. An example of a deposit would be money you received as a gift, large one-off payments such as tax returns and inheritances that are being used for the purchase that will not count towards your savings – but can be used to form part of your overall deposit. Whereas savings or ‘genuine savings’ as it’s usually called by lenders, is considered as the money that you have saved or held over a period of time (generally around 3 months) from your own income sources.
Many banks will also consider gifts and one off payments as savings if you’ve held it for over 3 months. The threshold where lenders require a 5% ‘genuine savings’ deposit can vary from one the next. Most lenders require genuine savings once your loan is over 85% of the purchase price, however there are some lenders that don’t need it until you hit 90% and even some lenders that do not require genuine savings at all – however the true ‘no genuine savings’ lenders may not be as competitive as having your genuine savings in order and my not be as easy going with their assessment.
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Minimum deposit requirements
You may have heard the term ‘5% deposit’ and thought that is all you need to get your home. Whilst there are a few lenders that can offer a 95% loan, there may be further restrictions due to mortgage insurance. In many cases the 95% loan must also include any mortgage insurance that is being added to your loan, which usually means you need to contribute some additional funds to keep the loan below the threshold. There are a very limited number of lenders that can offer a true 95% loan – that is to say you can borrow 95% of the purchase price, and then ad mortgage insurance on top of the 95% – which actually means your technically borrowing somewhere between 97-99% of the value of the property.
So there are certainly true 95% options available, however they generally attract higher interest rates and higher mortgage insurances. To ensure you have more options to choose from we would usually recommend you have about 7-8% deposit as this gives you far more choice of lenders and far better offers. At the same time if 5% is all you have then the true 5% only lenders are still a great way to get your foot in the door.
Keystart 2%
If you are looking for an alternative that requires less of a deposit and less genuine savings, than Keystart is your answer. Whilst they do not require mortgage insurance for their lending at all, their rates do tend to be higher than many other lenders and so this may offset the savings made with mortgage insurance. Keystart require that you only have 2% deposit, of which 1% must be considered genuine savings. UPDATE: Keystart have had a recent policy change and can now consider with no genuine savings at all as they look at other key area’s of your budgeting – get in touch with us for for information on this!
Keystart is a government funded lender designed to help low income earners and first home buyers in to home ownership. As such they do come with their own restrictions, such as income limits. Yes, that is not a typo – they are likely the only lender where they can turn you away for earning too much!
Guarantors
Another option you could consider is the use of a guarantor, which is usually a family member that can be used to help secure to loan. A security guarantee works by simply using the available equity in the guarantor’s property to keep your loan below 80% of the property value. There will be a mortgage taken against the guarantor property to help support the guarantee, generally it is a limited guarantee, meaning they are only guaranteeing roughly 20-25% of your purchase price. This could be an option for someone who is wanting to gain home ownership quickly. Each lender is different, but this could allow you to use less money for a deposit or no deposit at all. The other benefit is as the loan is below 80%, there is likely to be no mortgage insurance.
Additional funds you may need
As a first home buyer your often don’t have to worry too much about additional funds, but when buying your second home it can be easy to forget stamp duty given you didn’t pay it the first time around. Be sure to check the current stamp duty rates for your chosen purchase price and ensure you have these funds available if its not your first home, or if you are spending more than the first home buyer thresholds. You can find out more about the first home buyer grants by clicking here!
It’s also recommended to have some extra funds for council rates, water rates and your settlement agent. This amount can vary depending on suburb and time of year, as you pay the reminder of the year’s rates at settlement. Typically less than 1% of the purchase price is more than enough, but you can get exact figures from your settlement agent – or just ask Emanate Finance.
So in summary, funding the deposit for your new home may seem like a daunting task, but rest assured there is usually an option to fit your needs. First, keep your genuine savings consistent. Secondly, do not mix up the savings and the deposit, as they are separate items and cannot be used interchangeably. Lastly, low deposit and guarantor options are available if you need them. Depending on your chosen option, you may have to compromise in other areas – perhaps a slightly higher rate to get your home now with minimal deposit, or perhaps more time saving to get the bigger deposit and increase your savings? Whatever you chose, make sure you speak with your trusted Emanate Finance home loan consultant before you decide so you can get the right information and understand your options in detail.
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