One of the biggest hurdles to buying a property is saving for a deposit. The deposit is used to purchase part of the property and will be a factor in your loan application assessment by a lender or mortgage insurer. But it can be hard knowing exactly how big your deposit should be.
What percentage should it be?
While in the past some lenders offered home loans without requiring the borrower to have sufficient funds for a deposit, that’s not the case with Pepper Home Loans or most other lenders anymore. The minimum deposit to take out a Pepper Home Loan (on some products not all of them) is 5 per cent of the total purchase price of the property, but this will depend on how much you are borrowing and the type of loan. You will also need to have additional money available to pay the fees and charges associated with your loan, so it’s a good idea to speak to one of our Lending Specialists to make sure you’ve got the deposit and the additional funds that you need all covered.
Working out what you need to think about for your deposit
Lenders generally use what’s called a loan-to-value ratio (LVR) as the first step to calculate the amount of deposit you need. For example, an LVR of 95 per cent means that the amount of your loan is 95 per cent of the value of the property. If the property is valued at $300,000 and you have an LVR of 95 per cent, you can borrow $285,000. The remaining $15,000 would come from your deposit.
So the amount of LVR that a lender may ask for is dependent on the property value, but it is also considered in relation to the borrower’s circumstances and which particular product they are applying for.
The borrowers circumstances in the loan calculation include things like their income and their credit score.
At Pepper, we go a step further. We assess your application on all its individual merits. So rather than just relying on a credit score, one of the other factors we may look at is your ability to save a deposit.
Mortgage security processes on low deposits
Most banks may be willing to lend to people who have a deposit of less than 20 per cent, but they will require you take out what is called lenders mortgage insurance (LMI). This is insurance that covers the lender if you fail to pay back your loan – like an extra buffer zone for the lender’s risk.
Some other lenders would need to seek third-party insurer approval, which adds in another step in the process and may make it more difficult to obtain a loan. At Pepper, we do not require third-party LMI approval. However, we may ask you to pay a mortgage risk fee (MRF) to secure ourselves if for some reasons you’re not able to meet your repayments.
The extra costs when you buy a property
Another thing to remember when you’re working out how much money you need to save before you buy your property is that the deposit only covers the property price. There will be other costs you will have to pay upfront that will also need to be saved for. Things like conveyancing, lender’s fees and stamp duty. It’s worth adding in all these when you are doing your sums. We recommend speaking to your conveyancer or lawyer to confirm the costs involved.
Types of savings: Genuine vs non-genuine or gifted deposits
It’s important to remember that some lenders won’t accept a gifted deposit – for example, a loan from your family or relatives – as ‘genuine savings’ and have strict policies around only genuine savings. So it's a good idea to do your research before assuming that a gifted deposit would secure you a loan.
At Pepper Money, we accept 100% gifted deposits on a majority of products; however an assessment of your individual circumstances and eligibility based around your credit/repayment history, employment, income, and existing debt is still required. Other forms of deposits, such as a second mortgage, private loan and non-genuine savings may also be accepted. Learn more about the type of savings Pepper Money accepts here.