How much is the deposit for a house?
For many people, the biggest question when purchasing property is – How much is the deposit for a house? One of the first hurdles to overcome when purchasing a property is putting together a deposit.
Generally, under a contract for sale to purchase a property, purchasers are required to pay a 10% deposit. The 10% is calculated with reference to the agreed purchase price. On a $500,000 property for example, the 10% deposit would be $50,000.
Under the standard terms of the NSW contract for sale issued by the Law Society of New South Wales, the purchaser forfeits their deposit to the vendor if they cannot “complete” a contract, that is, if they cannot pay the balance of the purchase price by the time specified in the contract. This means that a purchaser risks losing their deposit if they enter into a contract they cannot complete. This may seem like a very onerous condition and indeed, for most purchasers, it means a lot of money is at stake. It is however intended to reflect the seriousness of the deal between a vendor and purchaser.
As a purchaser, you can negotiate to pay a deposit of less than 10%. You must negotiate via the vendor’s real estate agent or conveyancer. It is always a good idea to discuss the deposit you are paying with your conveyancer to make sure you fully understand your rights and obligations.
When looking to purchase a property “deposit” also refers to the amount a purchaser is able to personally pay towards the purchase price from their savings as opposed to the amount the purchaser needs to borrow from a bank or other financial institution. This is the biggest part in determining how much deposit for a house.
Each bank and financial institution will have its own requirements that a purchaser needs to meet in order to obtain finance and purchasers. It is however useful to keep in mind that from a lender’s perspective, the larger your deposit, the more appealing you will be as a borrower because you represent less of a risk to the lender. Lenders will take into account your “loan to value ratio” (“LVR”), that is the amount of the loan you require divided by the value of the property as appraised by the lender.
Usually, if your LVR is higher than 80%, the lender will require you to pay for lender’s mortgage insurance [link to LMI article] which is intended to protect the lender in the event you default on your loan. Mortgage insurance can be costly and it often makes sense to save a little more to avoid the cost of the insurance.
Finally, don’t forget the other costs of a purchase such as stamp duty and conveyancers’ fees. These are necessary expenses and lenders will usually require you to have those costs covered in addition to your deposit when calculating your LVR.
Calculating how much deposit for a house isn’t as straight forward as some expect – so be sure do consult with your lender, mortgage broker and conveyancer.