The 20% Deposit Myth: Why You Might Not Need That Much to Build

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Do you really need a 20 percent deposit to get into your own home? Short answer? No, it’s a myth. You do not need a 20 percent deposit to get into your own home. The misconception around this comes around, one, it’s a lot to do with our parents. I always have clients and the message, Hey, how do I get started?

Just working to save to my 20 percent deposit and then I chat to them and their mom and dad have told them about That they need a 20 percent deposit You do not need a 20 percent deposit to get into your own home the minimum requirement Through a bank to get into your own home for a deposit is 5 percent of your borrowing So general rule of thumb the 20 percent comes into the equation with lenders mortgage insurance So if you have a deposit of 20 percent or less, you pay lenders mortgage insurance.

Now lenders mortgage insurance is a fee that the bank charges to protect them. If you don’t pay your loan in short, short summary. So it’s a fee that you have to pay that protects the bank. And it gets added onto your loan, depending on how big your deposit is. So, you know, if your deposit is 10%, You’ll have less lender’s mortgage insurance on there compared to somebody who’s putting the minimum requirement down a 5%.

If you put down 15 percent deposit, you’re going to have less lender’s mortgage insurance on there because you’re putting down a bigger deposit. If you put down a deposit over 20%, then there’s no lender’s mortgage insurance. So the intention behind saving a 20 percent deposit is to avoid lender’s mortgage insurance.

Not, it’s not the only way to get into your own home. Now a 20 percent deposit with how prices are going at the moment, it’s a huge deposit to save. And for quite a lot of people, 20 percent deposit is not achievable, especially in the way the market’s going at the moment. You cannot save as quickly as the market is moving.

So, you know, I’ve had people over the last 12 to 18 months who have saved 10 grand, but then lost 30 or 40 grand in their borrowing capacity because interest rates have gone up. When interest rates go up, your borrowing capacity goes down. Same as with the way prices are moving, house prices and building prices.

Prices are moving up so you’re saving, you might save an extra 10, 000 but then the price might have moved up an extra. 000. So then you’re in the same place or that you were before it’s all about understanding when the right time is for you and getting into the market when you have your deposit and when you can afford it.

So using that 5 percent deposit helps you get into the market. Quicker. When you get into the market, you’ve got your foot in the door and you’re building that equity and you’re paying down your mortgage rather than waiting. There’s a lot of people waiting for prices to drop, waiting for the market to go down, blah, blah, blah, blah, blah, insert quotation.

And those people, you know, they’ve been sitting there for the last 12 to 18 months. Imagine if they got into the market when they were ready and they had their 5 percent deposit and it was ready to go 12 months ago. Rather than the price going up 80 grand to now it’s less achievable, they would have that equity sitting in their property.

Went on a little bit of a tangent there, off topic.  With your deposit, your minimum requirement is 5%. Now, Lender’s Mortgage Insurance, there’s a scheme at the moment, the First Home Guarantee Scheme. As a first home buyer, if you go under this scheme, you don’t pay Lender’s Mortgage Insurance with a 5 percent deposit.

So that’s huge, you’re saving 20, 000 to 30, 000 depending on how much Lender’s Mortgage Insurance is on your loan. You are saving this.  It’s still with a 5 percent deposit. So it’s exactly the same as going as 20%, 20%. You can go in on a 5 percent deposit, get your foot in the door, and there’s still no lender’s mortgage insurance.

Now let’s remove that and let’s say that grant isn’t available. If you go in with a 5 percent deposit, you would be paying lender’s mortgage insurance. So that’s the difference and how, where that misconception comes around. You don’t need a 20 percent deposit to get into your own home. You only need a 5 percent deposit to get in with a bank.

Keystart is a whole different thing. So we can save, dive into some Keystart stuff on another episode. It’s not really getting used too much at the moment because the interest rates are much higher because the deposit is lower. So that’s your trade off that you pay with Keystart. The objective is to get into your own home when the time is right for you.

You know, you can’t time the market. I’ve chatted about this on one of my previous episodes at the start. You cannot time the market. You don’t have a crystal ball. You don’t know when it’s going to go up. You don’t know when it’s going to come down. When prices are going to drop, when interest rates are going to drop, instead of waiting to time the market, work out when is the right time for you.

Can you afford it? What’s your income like, your debts, your borrowing capacity, your deposits? Understand your finances and your numbers and get into the market when the time is right for you. If you have any questions about deposits, finance figures, anything like that, head to the show notes below and book in a discovery call.

And we can have a casual chat and I can answer any of your questions that you have. 

Thank you so much for tuning in to the home building like a boss podcast.  I hope you enjoyed today’s episode and learn something new. Remember, you’ve got this and I’ve got your back until next time. Stay inspired, stay informed and stay confident on your building journey. I can’t wait to chat with you.

on the next episode.  Don’t forget to check out the show notes for more information and free resources. If you haven’t already, hit that subscribe button so you never miss an episode of the Home Building Like a Boss podcast.