Do You Need a 20% Deposit and Why Saving Could Be Costing You Money

The notion of saving a 20% deposit for a home purchase has long been ingrained in our minds. However, it's time to explore how adhering to this conventional wisdom may actually be costing you money in the long run. In this edition of Building Masterclass, we'll explore the concept of a 20% deposit, its origins, and alternative options that can save you both time and financial resources.

What is the 20% Deposit:
For decades, the idea of saving a 20% deposit has been presented as the gold standard for homebuyers. The assumption is that a larger deposit equates to better options and interest rates with lenders and banks, as it reduces the loan-to-value ratio and eliminates the need for Lender's Mortgage Insurance (LMI). However, it's essential to question whether this traditional approach is always the most financially savvy.

Understanding the Origin:
The 20% deposit requirement is rooted in the concept of mitigating risk for lenders. A higher deposit reduces the lender's exposure to potential defaults and acts as a buffer against market fluctuations. By reaching the 20% threshold, borrowers can avoid paying LMI, which protects the bank in case of default. However, it's crucial to assess whether this upfront cost-saving justifies the potential financial drawbacks.

Savings vs. Property Price Increases:
Saving up to 20% can be a daunting task, especially in markets with rapidly rising property prices. Consider this scenario: You have $100,000 saved and aim to reach $150,000 for a $750,000 house deposit. If property prices are increasing at an annual rate, it may be challenging to outpace the market and achieve the figure before prices escalate further.

Alternatives to the 20% Deposit:
a) Lenders Mortgage Insurance (LMI): Rather than waiting to save a 20% deposit, opting for LMI can be a viable option. LMI allows you to secure a loan with a smaller deposit, providing access to homeownership sooner. While LMI incurs an additional premium, it allows you to enter the market and potentially benefit from property appreciation.

b) Family Guarantees: Another alternative is leveraging family guarantees, where a family member uses their property as collateral to support your home loan. This option eliminates the need for a substantial deposit and can open doors to homeownership while minimising upfront costs.

c) Government Schemes: Explore government initiatives such as the First Home Loan Deposit Scheme. These programs aim to assist first-time buyers by providing a guarantee for their loan, allowing you to secure a property with a deposit as low as 5%.

The 20% deposit has shaped our perception of homeownership for years, but it's time to challenge its validity. While a larger deposit offers certain advantages, it's essential to assess whether the time and financial costs associated with saving 20% align with your goals. Explore alternatives such as LMI, family guarantees, and government schemes that can provide more flexible entry into the property market. By understanding the dynamics of savings against property price increases, you can make an informed decision that suits your financial circumstances and aspirations. Remember, the path to homeownership should be tailored to your unique situation rather than adhering to conventional wisdom.
NOTE: The information within this blog is intended to be general in nature and is not personal financial advice. Burbank is not a financial advisor. You should consider seeking independent financial advice to check how the information relates to your unique circumstances.

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