Especially if you’re looking to purchase your very first home, you will have many questions about financing including just how much of a deposit you will need. The rules for most banks and other mortgage lenders are generally similar when it comes to deposits, and they require you to have a certain amount of money saved before they will lend you the money for the property. Generally the more you have saved the more a bank or financial institution will lend you for property, and the reverse is also true, with most banks requiring at least a minimum of 5% of the purchase price of the property.
Residential property investment experts always suggest that you have as much as possible saved before considering purchasing property, as this can reduce your overall mortgage over time as well as other fees and charges. If you have saved 20% or more of the purchase price of a property, for example, you will be able to avoid having to pay lenders mortgage insurance on top of your loan from the bank. If you have less than 20% of the purchase price then the insurance will be added to your mortgage costs, either as an upfront fee or spread out over the term of your loan. As a general guide, if the purchase price of the property was $500,000, the bank would ask you to have a 5% deposit of $25,000 with lenders mortgage insurance, and $100,000 without the insurance.[i]
Another property investment strategy is to apply for a deposit protection bond, which allows you to buy a property before having a deposit saved or if you are eligible for the First Home Buyers Grant. This can also be particularly useful for property investors who wish to purchase another property or if their cash is tied up in other assets. Generally, a deposit protection bond can be issued for up to 10% of the purchase price of the property.
As with all financial matters the type of deposit required may be different depending on individual circumstances and the type of property you may wish to buy. If you are planning to buy a studio apartment, for example, you may find that the banks and other lenders impose stricter rules on borrowing money, including requiring at least a 20% deposit and having more expensive Lenders Mortgage Insurance as well.[ii]
Off the plan properties may also require different borrowing rules, although in general these are easier to fulfill than studio apartments – 5% and 10% deposits are not unusual, with lenders sometimes willing to issue a deposit bond of bank guarantee which means that investors only need to pay the deposit upon completion of the development. This can be a fantastic way to purchase a residential property investment while saving for the deposit while the property is actually being built.
Ultimately, how much you will need for a deposit will be dependent on your financial circumstances and the type of property you are looking to purchase. It is always a good idea when thinking about property investment strategies to seek the assistance of an investment expert such as Ironfish.