One of the most common misunderstandings we get with many borrowers (not just first time buyers) is the difference between deposit required to purchase a property and/or a deposit or contribution required to obtain a loan to purchase property. These are in fact two separate issues.
Deposit to Secure Property
This is an amount you would be required to pay in order to secure the property you are looking to purchase, and is usually payable on signing a contract. The amount can vary from as little as $1,000 through to 10% of the purchase price. Various agents and developers have different processes and requirements in relation to how you can secure the property you are after. Our advice is to have a good conversation with the agent or developer to ensure you understand correctly the process they follow.
Deposit or Contribution to Obtain a Loan
As stated above, a deposit or contribution to purchase or obtain a loan to purchase property is different to that of a deposit to purchase or secure a property. In general terms, one of the key criteria lenders consider when granting a loan is how much is the property worth vs how much we are lending against that property, this is known as Loan to Value Ratio. For example, a property worth $500,000 with a loan of $400,000 is a Loan to Value Ratio of 80% (400,000 / 500,000 x 100 = 80%).
There are lenders that will lend as high as 95% of the value of the property. Now this is where it gets a little confusing. Unfortunately this does not mean you only need a deposit of 5% to obtain a loan, as on top of that 5% you will need a contribution to cover Stamp Duty and Lenders Mortgage Insurance (although it is possible to include Lenders Mortgage Insurance in the loan up to 97%). As one of our clients described it, “Lenders look at your deposit/contribution from the top down”. Eg, they look at the size of the loan compared to the value of the property, rather than the size of the deposit.
More details on how much deposit and contribution you require can be found on the link here. Or feel free to contact us on 03 8823 5400.