How much should you save for a house deposit?
Saving enough money for a house deposit is one of the first steps to achieve in buying your first home. So how much do you really need?
Some but not all financial institutions will accept a minimum deposit of 5% of the value of the property. Therefore, when acquiring a house valued at $500,000 the minimum deposit would be around $25,000.
However, a deposit that generates favourable conditions for you as a borrower should actually be around 20% of the value of the property, this would be equivalent to a deposit of $100,000 for same valued house.
Why would you pay more of deposit if you don’t have to? Allow us to explain the advantages and disadvantages of both options.
5% deposit of property value
The great advantage of a minimum deposit is that you can get your house sooner as you don’t need to save as much money, or you may even be able to keep some of your cash savings in the bank for a rainy day or other life goals. However, these great advantages entail acquiring a loan with some unfavourable terms and conditions including the requirement to take out Lenders Mortgage Insurance (LMI). This insurance protects the lenders in the case of borrowers defaulting on their loan repayments and not paying back the loan. The LMI premium is a one-off, non-refundable fee which is paid at loan settlement. It can be added onto the total home loan amount, however this also means paying interest on the additional amount, increasing minimum monthly loan repayments as well as the amount of interest you pay over the life of the loan.
Another disadvantage of such a small deposit is the higher interest rates usually offered. It’s much higher risk for the financial institution to lend almost the entire value of the property, so they tend to increase the interest rate of the loan. This can result in my higher interest repayments over the life of your loan, as you are paying interest on 95% of the value of the property and also often at a higher interest rate. To add to this, you would want to make sure you have exceptionally solid employment history, credit history and consistent savings history, as this will all be taken into account to meet the criteria of being eligible for such a small deposit.
20% deposit of property value
A deposit of around 20% of the value of the property obviously has the disadvantage of waiting longer to buy your dream home, as saving the equivalent of a fifth of the value of the property doesn’t happen overnight. However the advantages of doing so may make the sacrifice and wait worth it in the long run.
One of the advantages of giving a 20% or more deposit is LMI is not required due to your loan representing less of a risk to the lender. This means you avoid the expense of the one-off payment of around 2% of the value of the property, as well as the increased interest repayments if you added it onto your loan. Your interest rates are likely to be more competitive when you have a higher deposit and your interest generated over the life of the loan will also be less because you are only loaning $80% of the value of the property. For the $500,000 property, paying the extra 15% deposit can save you a whopping $50,000 on interest repayments over the life of your 30 year loan (based on a 3% interest rate), and this doesn’t include the savings on extra interest you would accrue on LMI if you borrow it.
It’s always a better financial decision to save as much as possible before buying a house. The more money you save the more borrowing power you will have, giving you access to a wider variety of lenders, lender deals, lower interest rates, lower repayments and more flexible loan conditions. This all equals more money in your pocket at the end of the day.
If you need to know more about the best home loans for your deposit, don’t hesitate to get in touch, we are always here to help! Give us a call on 1800 3 PEASY or contact us via our website www.peasy.com.au.