How Much Do You (Really) Need For A House Deposit?
30 March 2017
If you’re saving for a house, it can be hard to know when exactly to stop. When will you actually have enough money to go looking for a house and actually put down a deposit? After all, a home loan is a huge life commitment. You’re generally not expected to pay it off in less than 25-30 years. You don’t want to rush into it.
Given all that, obvious logic suggests you should save as much money as possible for as long as possible before you go looking for a house. But, we’re only alive for so long. We can’t sit around stockpiling money forever. So, again. When do you stop? How much money do you need to put a deposit on a house? Is there even a definitive answer to that question?
Much as every person in life is different, so too is every person’s home, and home loan situation. But, there are a handful of considerations and general rules that should help anyone to figure out if they’re financially ready to hit up their bank or lending institution for a loan. So, roughly speaking, how much do you really need for a house deposit?
Well, it is actually broadly possible to access a mortgage with a deposit amounting to 5% of the overall purchase price from some financial institutions. So, to put that into concrete numbers, you could theoretically borrow $380,000 with a deposit of $19,000.
While it is broadly possible to access those types of loans, your ability to borrow such amounts for such low deposits will be dependent on a lot of factors. For example, you’d probably need to have an exceptionally solid employment history, a similarly exceptional credit history and proof of a consistent savings plan. You’d also need to purchase home loan/mortgage insurance with less than 20% deposit.
What is mortgage insurance? Basically, if a bank or financial institution isn’t confident they’ll be able to recoup their loan if you fail to make your repayments, they’ll ask you to purchase loan insurance when you borrow your money. That way, an insurance company will compensate them even if you fail to repay your loan and they can’t otherwise recoup their investment.
Think of a $400,000 house. If a bank lends you $360,000, and you repay $40,000 but then fall prey to financial woes and can’t make your repayments, the bank is then $320,000 out of pocket. They would seize your house – but they may only be able to sell it for $310,000. They’d still be ten grand out of pocket. And, that’s not even accounting for the interest they would have expected on such a loan.
Hence, mortgage insurance. You can pay it upfront or include it as part of the loan. So, borrowing $367,000 instead of $360,000 (or, paying $7,000 upfront). At this point, it’s important to remember that borrowing a higher amount not only means repaying that higher amount – but also repaying a higher amount of interest. For example, paying Interest on $367,000 at 5%, is obviously more than paying Interes on $360,000 at 5%.
(Now, even if that sounds like a relatively small difference – remember that any interest rate is subject to change. You may be able to repay your loan at 5% interest. Can you do it at 7%? Or 9% Or, worst case scenario, 19%? They’re all possibilities.)
Now, it is possible to sidestep purchasing mortgage insurance by having someone act as a guarantor for the loan. This is basically where another person puts their property up as additional security for a loan. The most common example of this is a parent putting their property up as security for their son or daughter’s loan. (Bear in mind, if you fail to make your repayments in that situation, your parents could end up selling their house to repay your loan. Not a pretty situation.)
So, in regards to that question – ‘how much do you really need for a house deposit?’ You can feasibly get away with only 5% of your loan. But, as demonstrated above, that won’t come without considerable complications, expenses and risks. Perhaps a better question to ask is – ‘how much should you have for a house deposit?’
Which actually has a more straightforward answer. Generally, banks and financial institutions will recommend you have a deposit of at least 20% of your prospective property’s purchase price. So, if we go back to our $400,000 home, you’d want to provide $80,000. Now, that will take a lot longer to save – but you’ll pay less interest, you won’t have to pay insurance costs, and you won’t need to have a guarantor.
As always, it’s up to you what will work best for your situation. Really, when it comes to a long-term financial commitment like a home loan, it’s as much about your ongoing financial comfort as it is about having any specific set of money – even if you have that token $80,000, can you guarantee you’ll be able to make your repayments into the future? Even if your interest rate changes? That’s what will really determine if you’re ready to buy a house.
(If you’re unsure if you can tackle your repayments, you may want to look at a Home Loan Repayment Calculator or simply speak to a couple of lenders. They’ll help you figure out how much a home loan may cost you and whether or not you’re in a position to tackle it.)
Ultimately, as I said above, as every person is different, so too is every person’s home, and home loan requirements. Think about what works for you.
Lenders Mortgage Insurance
If your deposit is under 20% you'll need to pay a Lenders' Mortgage Insurance (LMI) premium. It's a one-off cost that's added to your loan amount, so you don't have to pay anything upfront. It's important to talk to us about how much this will be - based on purchasing a home for $600,000 with a 5% deposit, it could be in excess of $20,000, depending on the state you live in.