Owning your own home is still an important aspiration for many Aussies.
Despite home ownership being harder to achieve today than in the past, especially in many capital cities around the country, the basics of buying a home remain the same.
But first, you’re going to need to be able to put down a housing deposit.
But what exactly is a housing deposit and how do you know if you’ve saved enough for one?
What is a housing deposit and what is a mortgage?
Simply put, a housing deposit is saved money — often around 20 per cent of the property’s purchase price, though it can be more — that you contribute to the purchase price of a property. For instance, if you save a $20,000 deposit for a $400,000 property, your housing deposit represents 5 per cent of the purchase price of the property.
Once you have a housing deposit, you can apply for a home loan for the balance of the purchase price which involves getting a mortgage.
The mortgage means that you while you own the house, the bank has a legal interest in the property (as security) as per your mortgage, which is a legal agreement.
Is a bigger deposit better?
In short, yes. There are several reasons why it can be advantageous for a borrower to take the time to save a bigger housing deposit before diving into the property market.
For instance, if you turn up to a lender with a large deposit, say 40 per cent of the purchase price, it shows that you’re a disciplined saver and this may help you with your home loan application.
Indeed, building a good relationship with a lender can help you secure a home loan for a house.
Having a bigger deposit generally also means that there’s less chance you will need Lenders Mortgage Insurance (LMI). This is where your lender requires you to make a one-off payment to protect them against your potential non-repayment. LMI is usually required if your deposit is less than 20 per cent of the total value of your mortgage.
Another plus is that the bigger the deposit you manage to save up, the less you have to borrow. This is good because it usually means lower repayments and less interest over time.
What counts as a deposit?
The most basic contributor is savings. Lenders like to see a track record of deposits into a savings account over a period of time.
Putting a little away each pay cheque is one of the fastest ways to save for a house.
While savings are usually the foundation of a housing deposit, there can also be other contributors like monetary gifts, guarantees by family members, shares, and equity.
In some Australian jurisdictions, such as NSW, there are also grants for first homeowners that can assist. In NSW, for new builds you may qualify for a $10,000 grant.
Who does the deposit get paid to?
Once you’ve won at an auction or agreed on a sale price, you’re ready for the really important part: signing the contract of sale. It’s at this point when you usually transfer the agreed deposit, whether that’s 5 per cent, 10 per cent or 20 per cent of the purchase price, to the vendor.
Once the contract of sale has been signed and witnessed, the deposit goes to the seller, or to the real estate agent’s trust account, depending on the circumstances.
Note that while your lender may require that you have 20 per cent of the purchase price available as a deposit at sale contract time, the seller may only need less, like 10 per cent.
When it comes to paying the housing deposit, you have several options available to you including bank transfer, cash, cheque, and in some cases a deposit bond.
You’ve paid the deposit, now what?
You managed to save up the deposit, secure your dream home, and you’ve made it through the contract for sale process.
There remains a cooling-off period that allows you to back out of the contract if you have a change of heart or are hit with some kind of financial or personal crisis.
But remember, if you bail out, you’re unlikely to get your deposit back and there’s no cooling off period if you purchase at an auction. The length of such periods varies across Australia.
