How much deposit do I need?
The most common question that I get as a mortgage broker is about the amount of deposit required. The answer will depend on what lender we use, what the purpose of the loan is (owner occupied or investment) and where we buy (metro or regional). It will also depend on whether you are trying to avoid paying lenders mortgage insurance (which requires a higher deposit) or whether you are looking to pay the minimum deposit required.
All lenders work on a percentage based system when determining how much they will lend against your home. Most lenders will lend between 90-97% of the value of your home, however this varies a fair bit based on the lender, purpose & location. This percentage may or may not include the lenders mortgage insurance cost as well, once again depending on lender policy.
With lenders mortgage insurance: In the example below we are considering a lender that will lend up to 95% of the value of your home, the purchasing fees work out to 5.5% of the value of your home and the lenders mortgage insurance is approximately 2.5% of the value. For this example we would need approximately 13% for the deposit (2.5% for lenders mortgage insurance plus 5.5% for fees plus 5% to cover the difference between the purchase price and loan amount).
Without lenders mortgage insurance: Most lenders will require you to borrow 80% or less to avoid lenders mortgage insurance, so we would need a total deposit of approximately 25.5% to completely avoid paying the lender mortgage fee (20% plus 5.5% for fees). This is usually not an option for most, especially first home buyers, as coming up with this amount of funds can be tricky at best.
There are low deposit loans in the market, that do reduce the minimum amount required and most of these products do come with some down sides, however they can still be a very good solution for some people looking to enter the market sooner rather than later.
Some lenders will advertise the minimum deposit required for their loans, however keep in mind that they are only advertising the difference between the purchase price and loan amount (ie the 5% in the first example) and not mentioning the rest of the deposit required i.e. the lenders mortgage insurance and purchasing fees.