How important is a deposit?

[HBFlanker]

When purchasing a first home, how important is it when attempting to obtain a loan?

I had a debate with a friend on the weekend, he has just started a new job on decent money and stated that he is looking at buying a house in the next 6 months with his brother, I said to him are you looking at getting a deposit together first and his reply was "nah ill be sweet, I'm only going to borrow to 220k"

Is a deposit necessary or will he be right to get a loan with next to no deposit?

 

[TigerCraig]

Most banks wont lend to you unless you have at least 5% deposit, and you need to show a genuine pattern of saving

If you have less than 20% deposit you will more than likley have to pay Mortgage Insurance which is not a bank fee but an insurance premium that covers the bank should you default on the loan and the amount the bank sells your house for not cover the mortgage. It can be very very expensive.

 

[Gibbke]

2006 - ING gave me a $180k home loan with no deposit. I was told at the time that if I'd done it two years earlier, they would have required a deposit, boom times in the housing industry, but because I was a teacher on around $60k and had been permanent since 2003, and things were grimmer in the property market, they were now looking for my type to sell to - people who could more reliably pay the loan if they took this risk. Not sure how it works now, but with the decline of the housing market, I'd be surprised if a sweet talker couldn't close a very favourable deal these days...

 

[Smell The Glove]

Trying to save a deposit myself at the moment. Been saving for over a year now and have 35K saved but bloody hell its hard work. Should have 70K or so by the middle of next year, but if the history of house prices is anything to get by, even that won't be enough....

Would be interested to hear from others in the same boat.

 

[Visions]

Ever since the GFC hit, lenders have become more stringent on handing out money. Only way nowadays to get a 100% loan (i.e no deposit) is through a family guarantee, where your parents (and maybe siblings) offer their property as security for an amount of 20% plus costs (stamp duty, etc) of the property you are looking to buy. You take out a loan for the remaining 80%. You still end up paying the mortgage for the full 100% loan but the bank is secured by two properties instead of 1.

If you can't do the above, then you need a deposit of some sort. Minimum amount is 5% and this needs to be shown as genuine savings (i.e. sitting in your bank account for a period of 3 months). You also need to fund stamp duty, legals, etc on top of this.

If you don't have genuine savings, some lenders will allow you to use non genuine savings (i.e. a "gift" from someone), however you then need 10% of the purchase price in these funds as well as enough to cover stamp duty, etc.

 

[Scotland]

It's all about LVR - loan to valuation ratio, which is why banks were lax 5+ years ago.

If you buy a house for $100k and it's worth $150k the next year then the bank has nothing to worry about should you default on the loan.

If you buy a house for $100k and it stays at $100k or drops to $90k, the bank wants peace of mind that if they need to sell it because you default they can get their loan amount back.

 

[pie chucker]

Very important and you shouldn't get a loan without at least 10% deposit. If you can't save for a deposit you won't be able to pay a loan of.

Better to have 20% in order to avoid expensive mortgage insurance.

Also remember an additional 10% approx for legals... That probably includes mortgage insurance which I didn't have to get

 

[Scotland]

Very important and you shouldn't get a loan without at least 10% deposit. If you can't save for a deposit you won't be able to pay a loan of.

Better to have 20% in order to avoid expensive mortgage insurance.

Also remember an additional 10% approx for legals... That probably includes mortgage insurance which I didn't have to get

10% for legals?

I reckon when I bought the settlement fees, transfer duties etc. were closer to 1%.

The biggest cost associated with a house purchase is stamp duty, which (over here anyway) first home buyers are excempt from paying up to a certain purchase value.

I think an important consideration in first home buying is how long you intend to own the house for and what your next step is. If you're planning on buying a $400k home, living in it for a couple of years then selling and trading up to a $600k home then you need to look at the fees/costs involved in both sales - not just the first. Chances are you'll lose around $50k in selling agent fees and stamp duty on the trade-up, is it worth it?

 

[Visions]

Very important and you shouldn't get a loan without at least 10% deposit. If you can't save for a deposit you won't be able to pay a loan of.

It's all relative. A lot of families rent which makes it hard to save a deposit quickly. You take the $1400/$1500 they pay monthly, and that translates to a $250,000 mortgage they could be paying instead. So it might be in the best interests to have a smaller deposit.

Better to have 20% in order to avoid expensive mortgage insurance.

Also remember an additional 10% approx for legals... That probably includes mortgage insurance which I didn't have to get

I assume you mean government charges such as stamp duty, etc. 5% is more the rule of thumb. LMI is a separate charge that can be capitalised onto the loan in most cases.

 

[pie chucker]

Yes Stamp Duty is the main cost and varies between states. In Vic legals cost me about 5% without mortgage insurance. I'm not sure how much mortgage insurance is but must be about 2-3%

 

[Visions]

Yes Stamp Duty is the main cost and varies between states. In Vic legals cost me about 5% without mortgage insurance. I'm not sure how much mortgage insurance is but must be about 2-3%

Depending on the lender, amount of the loan and LVR it can vary from 0% to around 5%.