Your home loan deposit explained

For many of the hopeful, wannabe homeowners in Australia, it’s not keeping up with home loan news and finding the right property that stumps them, it’s getting together enough money to form a decent-sized deposit for their mortgage.

Most people know you almost always need a deposit in order to buy a property, but few house hunters take the time to understand what their deposit is actually for and (in the case of first–timers) what they’re supposed to do with it when the time comes.

What is a home loan deposit?

Your home loan deposit is your down–payment, or first contribution, to the purchase price of the property that you’re buying. Paying this contribution means that you actually own a small part of the place.

Home loan deposits are often described as a percentage of the price of the property you are buying. A 20 per cent home loan deposit for a house worth $500,000 is $100,000.

Why do I need a home loan deposit?

You need to pay a deposit if you’re buying the property with a mortgage because it reduces the risk to the lender of giving you the mortgage.

When you first approach lenders for home loans it’s a good idea to let them know how much of a deposit you have because this will determine the size of your loan and could also determine the rate that you’ll pay on it and whether you will need to take out Lender’s Mortgage Insurance.

No-deposit home loans are very rare and not encouraged by Australian banking industry regulators.

But there are mortgage deals around that only require a five per cent deposit. That means you only have to put down five per cent of the price of the property and the lender will provide 95 per cent.

How much of a deposit do you realistically need?

Lots of lenders ask for buyers to put down a 20 per cent deposit nowadays. This is 20 per cent of the purchase price and doesn’t include the transaction fees. You can sometimes get offered a lower deposit, but you’ll probably have to pay Lenders Mortgage Insurance (LMI) to protect the lender against the chance of you defaulting on the payments.

You also have to factor in the costs of solicitor’s fees, stamp duty and any other expenses that your house move incurs. It’s a good idea to see if you’re eligible for any of the government schemes for first–time buyers as you could get help with your stamp (or transfer) duty, which can add several thousand dollars to your costs.

You can use a savings calculator to work out how much you’ll need to save in order to pay for the deposit and moving costs.

Why do I need a 20 per cent home loan deposit?

As with any financial product that involves you borrowing money, the less you have to borrow, the less you have to pay back.

20 per cent is the deposit size that will let you avoid LMI, which can sting a bit. You can usually pay your LMI off as part of the mortgage, but it’ll attract interest, so it’s better to save up more of a deposit and have done with it.

If you can put down 25 per cent or more, it shows that you’re serious about money and that you’re a “good” risk. Furthermore, if you own more of the property right from the start, you’ll probably find it easier to get home equity loans in the future if you need them.

Who gets my home loan deposit? Where does it go?

You pay the deposit to the vendor, the seller of the property, when you sign the contract of sale. This is the case no matter what the size of the deposit. It’s a part–payment before settlement takes place, which is when you own the property and you become responsible for the remainder of the purchase price—usually via one of several different types of home loans.

Once the contract of sale is signed, you enter into a legal agreement and you’re bound by the terms. You may find that your deposit goes to the real estate agent’s trust account instead of directly to the vendor; you’ll find this out when the time comes to pay, if not before.

When do I have to pay the home loan deposit?

If you’re buying the property through a private sale, you’ll pay your deposit after you and the vendor exchange your signed contracts.

If you’re buying the property at an auction, you have to sign the contract and pay on the day of the sale. This means you have to have the funds ready in a bank account to transfer, or in an account with a cheque facility.

It’s a lot of money, so how do I make the payment?

You can pay by cheque; although this is an increasingly rare method in most places now, it’s still common at auctions.

There is also the possibility of using a counter cheque if you don’t have a chequebook; you’ll need to go into your bank to arrange and collect one.

You can also make a bank transfer, although you’ll need to talk to your bank first because some institutions have a daily limit for transfer amounts. You may have to give your bank advance notice of the transaction and possibly pay a fee.

It’s also possible to use a deposit bond; a deposit bond is useful if your funds are tied up in other investments. It’s a guarantee that you’ll pay the deposit at the time of settlement (remember, you’re legally bound once you’ve exchanged contracts).

Not all real estate agents and vendors will accept deposit bonds and some banks don’t offer them, so make sure you can use one before you get too far along in the process. It may be the case that you have to make arrangements to release funds earlier than you expected to.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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