Experts bust the mortgage deposit ‘myth’

When it comes to the housing debate, there’s one number that just won’t go away: 20 per cent.

Many fear that’s how much they’ll have to save for a deposit. It’s easy to understand why – popular measures of affordability, such as those compiled by CoreLogic and CoreData, often assume a 20 per cent lump sum.

Except it’s not.

Back in 2015, the Reserve Bank noted: “the deposit required of a first home buyer is no longer necessarily around 20 per cent of the purchase price, but rather, more often in the 5–10 per cent range.”

Regulators have tightened the screws since then, but there are still mortgages with below 20 per cent deposits to be found, according to Dr Ashton De Silva from RMIT’s Centre for Urban Research.

He said homebuyers taking out bigger loans should consider the benefits of getting into the housing market now, rather than waiting to reach a certain deposit.

“It’s not just a case of working out that you’ve got to pay another $50,000 in interest. What is the economic benefit of securing that place now?” Dr De Silva told The New Daily.

“We expect people are making the decision that: ‘It is better for me to take on that extra cost and secure this dwelling.’”

Two Australians earning the average full-time wage, with average living costs, will likely qualify for a loan just over $1 million with one of Australia’s big banks.

Finder, a financial comparison website, lists a bevy of acronyms that offer low deposit loans, including: NAB, ME, CUA, IMB and HSBC.

Many lenders have created new financial products to help homebuyers enter the market, resulting in Australia having, according to Dr De Silva, “one of the most product diverse markets in the world”.

One option is lenders’ mortgage insurance, which lowers required deposits to a minimum of 5 per cent, meaning purchasers of a $500,000 property can require a lump sum of only $25,000.

Mortgage insurance is usually paid as a one-off charge, with the cost calculated as a percentage of the loan amount and based on the size of your deposit.

Occasionally, it can even be ‘capitalised’ into the value of the loan – which means you borrow more to cover the cost of the insurance. If you do this, you’ll pay slightly higher repayments, rather than a big sum up front.

It’s important to note the insurance only protects the lender against the risk of you defaulting on the mortgage, not you.

You need $200,000 to meet the 20 percent deposit on a $1 million dollar mortgage, an enormous sum for most Australians.

With mortgage insurance, a couple taking out a loan with a 5 per cent deposit would need $50,000, plus the cost of the insurance.

Some lenders won’t charge insurance on loans with a 10 per cent deposit, but this depends on job security and credit history.

Two Australians earning the average full-time wage, with average living costs, will likely qualify for a loan just over $1 million with one of Australia’s big banks.

Dr De Silva warned home buyers should do their homework and weigh up the costs and benefits of different loans.

“One thing that needs to be at the forefront is, ‘Can I afford to ride out any crisis that may arise?’”

Associate Professor Chyi Lin Lee, an expert in property market economics at the University of Western Sydney, pointed to 20 per cent deposits as a main source of difficulty for many homebuyers.

“We need to find an innovative way to help owner-occupiers to get into the market,” he told The New Daily.

Professor Lee said schemes which help homebuyers jump over the deposit hurdle – such as controversial first homebuyer grants – can be successful, despite the upward pressure they put on prices.

A caution: don’t overextend

Professor Lee warned lower deposits shouldn’t be an excuse for buyers to take out bigger loans than they can pay off.

This was backed by Dr Rachel Ong, deputy director at the Bankwest Curtin Economics Centre, who said people taking out loans with low equity can expose themselves to higher repayments.

“It isn’t a good idea to try and lower the minimum deposit because there’s people who might not be able to meet the payments, and the consequences of that are all the negative and quite severe,” Dr Ong said.

“There’s a reason why the minimum deposit is set at what it is.”