Deposit Required When Buying A Property?

Your deposit contribution plays an important role when you’re buying a home. A deposit contribution is a percentage of your home’s purchase price that you pay up front when you settle your home loan. Lenders often look at the deposit contribution amount as your investment in the home. Not only will it affect how much you’ll need to borrow, it can also influence:

• Whether your lender will require you to pay for lenders mortgage insurance (LMI). Typically, you’ll need LMI if you put down less than 20% of the home’s purchase price.

• Your interest rates. Because your deposit payment represents your investment in the home, your lender may offer you a lower rate if you can make a higher down payment as they may see you as less of a risk for a borrower.

So how much of a deposit payment will you need to make? That depends on the location of your home, type of property and which lender you go with. Different lenders require different percentages, usually ranging from 3% to 20%.

Additional to the down payment required, you should also have enough savings to cover any cost that cannot be rolled into the amount borrowed, these may include;

• Government cost such as stamp duty, mortgage transfer and registration fee

• Conveyancing cost

•  Building and pest inspection cost – if you are buying a house

• Moving and utility connection cost

Loan-to-value ratio (LVR)

The amount of your deposit payment helps give your lender the loan-to-value ratio (LVR) of the property. LVR is one of the main factors – along with debt-to-income-ratio and credit history – that a lender considers when deciding whether or not to give you a loan.

Your loan-to-value ratio indicates how much you will owe on the home after your deposit contribution and is expressed as a percentage that shows the ratio between your home’s unpaid principal and its appraised value. The higher your down payment, the lower your loan amount will be and the lower your loan-to-value ratio will be. Here’s the formula:

Loan amount ÷ appraisal value or purchase price (whichever is less) = loan-to-value (LVR)

For example:

• The home you want to buy has an appraised value of $550,000, but $500,000 is the purchase price

• The bank will base the loan amount on the $500,000 figure, because it’s the lower of the 2

• You have $50,000 (plus funds for cost) for a down payment, so you need a $450,000 loan to meet the $500,000 purchase price

• Your loan-to-value equation would look like this: $450,000 ÷ $500,000 = .90

• You multiply .90 by 100% and that gives you an LVR of 90%

 Lenders mortgage insurance (LMI)

If your deposit payment is lower than 20%, your loan-to-value ratio for conventional financing will be higher than 80%. In that case, your lender may require you to pay lenders mortgage insurance, because they’re lending you more money to purchase the home and increasing their potential risk of loss if the loan should go into default. Keep in mind that lenders mortgage insurance will increase your monthly payments as it’s normally added to the base loan amount by the lender.

When you consider how much to put down on your home, think about your lender’s requirements and what a higher or a lower down payment will mean for you. Paying LMI also allows you to get into a property market sooner rather than later.

Note: Some lenders allow a guarantor to support a borrower’s application by using their property as a second security. This ensures that the combined LVR is 80% or less, thus avoiding LMI cost. A guarantor cannot assist with the servicing of the borrower’s loan and must have sufficient equity in their property to provide guarantee. Restriction on loan purpose is also applied by lenders, most allow guarantor for first home buyers only.