Why is a deposit needed?
A deposit is generally required as a security for the bank. Lenders expect to get their money back from repayments, but in the circumstance, you fail to do so and the bank decides to force the quick sales of any property linked to your loan, they may not receive the total value of the property in that instance. A deposit limits the risk of them losing money. Most lenders are comfortable with a 80% loan to value ratio but may set restrictions of less than 80% for specialised properties.
In the ideal situation you will usually contribute around 20% deposit as well as all the additional fees and costs associated such as stamp duty and legal fees as lenders will more fund these.
The ideal deposit
The ideal deposit is 20% of the purchase price plus an additional 4% to cover costs. If you are unable to save that much of a deposit, there are pathways you can consider.
The minimum deposit
Nearly all lenders will allow you to borrow above their normal comfort level (eg 80%) if you are prepared to pay an insurance premium that protects the lender from the risk they are taking. The insurance is known as ‘Lenders Mortgage Insurance’ and the premium is added to the amount you borrow. The premium can be many thousands of dollars but reduces if you can save more.
Guarantors are another way you can avoid a deposit all together. You can generally borrow more than the property purchase price. This is achieved when a close family member, usually a parent, becoming a guarantor to your loan by allowing their property to be linked to your loan. This ‘family guarantee’ means the family member is sharing the risk with the lender – if you fail to make loan repayments their property could be sold by the lender.
After certain periods of time, there are options to remove the guarantee without waiting for the loan to be fully repaid.
Why you need to call us
The above explanation is a guide only. There are many options so it’s important to talk to us to about your circumstances so we can help you make the decision that’s right for you.
Call Mortgage Choice Northern Rivers today on 66847096