How much do I need as a deposit?

We get asked that question so often as brokers and there’s not a simple blanket answer that fits. First of all – that amount will vary as a percentage of the price of what you want to pay based on whether you’re going to live in the property or buy as an investment. That’s question number 1. For the purposes of this article – let’s imagine you’re buying a property to live in. For further simplicity, let’s say it’s your first home (this is the when we’re most often asked this question).

I always say when I’m asked this question that there’s four typical ways you can go about getting the deposit to buy your home.

Option 1. The old fashioned way – savings. 

If you’re looking at saving up your funds over time the bare minimum we used to advise you work towards is 10% of the purchase price (as a simple rule of thumb), but with the scrutiny that most lenders have put on these high loan to value ratio loans over the past years, the number of lenders who will lend in this space have greatly limited. Therefore now we recommend that you aim for around 12-13% as your minimum (noting that when all your costs are paid from this – i.e. stamp duty, conveyancing, lender’s mortgage insurance this still only gets you owning 5% of your home!

One pro: if you can put aside funds while you’re funding your normal living expenses it shows a bank (and you!) that you’re capable of saving. Interest rates are low right now – you’ll sign up for a 30 year loan and it’s very unlikely they’ll be this low for the whole of your loan period. Showing savings can show you not only have the personal fortitude to save, but that you can put aside funds on top of your current living expenses (including rent if you’re paying it) and are capable of coping with increased interest rates when they happen.

One con: this method can be oh so slow and dreary. There’s nothing exciting about saving, scrimping, budgeting – BUT – anything worthwhile in life takes sacrifice to work towards. This is no exception.

First home builders: If you’re eligible for a boost from your local friendly state government (such as $20,000 in Tassie for example) bear in mind that a bank will still want to see that you’ve contributed at least 5% in genuine savings yourself – bare minimum.

Government assistance scheme: As at 1/1/20 a new government assistance scheme is being introduced for first home buyers to allow them to purchase with a 5% deposit – see for further information or ask your broker. 

Option 2. Sharing is caring – gifts. 

Either in addition to your own savings, or in lieu of them, someone who loves you (you’d assume!) can offer you a gift. Check with your broker as to how much you’ll need, as the amount will vary lender by lender, but sometimes the above 10% can be completely replaced by a gift, other times it needs to be 20% + costs, other lenders will happily see you save up 5% and then a gift form the rest. I can’t say it enough – every lender has their own policies (that’s why you have a broker, to find the most suitable one).

Also note that with gift funds whether you have a rental history through a property manager may factor in and also – oftentimes gift funds can be treated as genuine savings once they’ve sat in your account for a period of time – check with your broker to see if this maybe an option for you.

One pro: it’s a lovely thing for a family member (typically) to be able to do to assist a loved in in getting into a home.

One con: you never want to have money get in the way of a family relationship – be sure the details of the arrangement are clearly agreed to before hand and fair to all concerned.

Option 3. The gift that keeps on giving – guarantor. 

As brokers we see a lot of parents, grandparents and sometimes siblings who have a significant amount of equity in a property (which means lower levels of debt or no debt against it) who want to consider the option of putting their property up as security to enable a loved one to buy their home. Again, every lender is different on how this works, but typically the guarantor will assist with the equity component of the loan (by putting their own property up as security for a period of time until such time as you only owe 80% of the value of the property).

One pro: this is a way for a family member (typically) to assist without needing to outlay a large amount of cash and it’s not something that would be designed to last forever (it also enables parents to do the same thing for multiple siblings for example without needing endless supplies of cash).

One con: this is perhaps the highest level of trust required in this arrangement, if things go awry then the parents (typically) going guarantor could be responsible for repaying part or all of the loan in question or their own property could be in jeopardy if a market heads very far south. If in doubt, talk extensively to the broker involved AND get independent legal advice.

Option 4. For the term of their natural loan – term deposit. 

There are a small number of lenders who will allow a loved one to provide a term deposit to guarantee your home loan. The term deposit will sit with the bank in question for the loan until such time as the purchasers pay the loan down to 80% of the value.

One pro: Like a guarantor, if the term deposit is for 20% + costs, you’ll secure typically preferential rates and the deal will be seen as overall less risk by the bank meaning easier approval.  Unlike options 2 and 3 – this sees the family member providing the term deposit earning their own interest during this time as they would a normal term deposit.

One con: Like options 2 and 3, it involves a large element of trust and requires a large amount of idle cash to perform.

With all of the options above this is general advice and not specific to your situation. Seek the advice of an accredited finance broker you trust and where appropriate legal advice.

– Kirsty