When purchasing a property, especially as a first home buyer, finding out your deposit is one of the most important things to research. With increasingly complex policies in Australia because of government regulation, the deposit requirements can vary widely for each individual and dependent on the lender being used. Here’s a breakdown to help you understand some of the factors which go into working out how much deposit is required.
Lender Specific Factors
Across the dozens of lenders in Australia, each has specific minimum deposit requirements. These policies are based on risk policies, with some lenders offering products with as little as 5% minimum deposits, whilst others can require as much as 20% deposits for any loan.
Lenders Mortgage Insurance (LMI) is the main factor which determines how lenders accept risk, so lenders who do not offer LMI loans will require a minimum deposit of 20%, whilst lenders who have LMI loans can reduce their minimum deposit requirements to 5-10%, with the majority offering 10% deposits.
Property Specific Factors
Deposit requirements are based on risk, with higher risk scenarios requiring higher deposits to offset potential losses in case of repossession. Common factors which will impact properties can be:
- Property location – in risky areas, postcodes with high vacancies or declining values
- Proximity to negative features – properties close to large power lines, industrial properties or other undesirable features can be declined for LMI purposes so a minimum deposit of 20% will often be required
- Damaged improvements – properties which are suffering from damage to the structure or internal improvements can reduce the maximum loan size a lender is willing to provide, requiring the borrower to make up the difference with an increased deposit. Missing essential features such as kitchens, bathrooms or structural issues will often require minimum deposit amounts increase from as low as 5% up to a minimum of 20% or higher.
Borrower Specific Factors
Lenders will not only restrict the ability to borrow based on security, but also the prospective borrowers details. Borrowers with a short history with their current employer, self employed or a less than perfect credit history can require significantly larger deposit amounts. As LMI is a product designed to cover losses incurred from repossession, most insurers will not cover purchasers which are in a higher risk category. This means that in these cases a lender will instead require you to provide a deposit of 20%+ as well as any government charges and fees.
How To Minimise Your Deposit Requirements
In many cases, for first home buyers the deposit is the main limitation holding them back from buying their own home. To put yourself in the best position to meet the deposit requirements with your lender, you should:
- Maintain the same employment for a minimum of 3 months, ideally 6+ months
- When looking at properties, stick to well maintained properties with all basic features – kitchen, bathroom, plumbing and landscaping
- Stick to mainstream locations not near any negative features such as power lines, commercial properties or major roads
- Speak with a Melbourne based finance broker who can review your scenario and identify any areas where you need to make changes to improve your financial picture
If you stick to the main points above, you can minimise the deposit that is required to purchase a home. As always however, the minimum isn’t always the best for your situation so be sure to work out what is right for you.