The year 2019 was a rollercoaster ride on many fronts, and especially so in the Aussie property investors market.
Not only has the Reserve Bank of Australia (RBA) cut the lending rate at least three times –and to a historic low of 0.75 per cent at that- but property prices across the nation also continued to tumble.
Of course, just about everyone with a property loan –particularly the desperate households who are doing it extremely tough- will welcome lower interest rates across the board.
However, on the flipside, prospective property owners who are busy saving up the required deposit for a bank loan are not happy at all! Lower interest rates are impacting them negatively for it will now take longer to achieve their target.
Fully aware of the negative impact of the low interest rates on deposit gatherers, the Government has even introduced a first-home loan deposit scheme aimed at helping budding investors get into the property market sooner.
Regardless, however, prospective investors will still typically require a deposit when applying for a financial institution property loan.
Please continue reading to learn what deposits the mainstream institutions normally require from us. Also, how a conscientious money-savvy person –e.g. a banker – might go about saving up the required amount.
What Is A Property Loan Deposit and Why Do Lenders Require It?
Financial institutions in the property-finance space typically require prospective borrowers to prove that they have saved up a deposit from their own funds.
The down-payment made by the borrower firstly serves to reduce the institution’s exposure risk in the specific property by providing a buffer between the existing market price and any future downward valuations.
Secondly, the deposits further provide a form of ‘psychological’ comfort to the lenders that, because the borrowers are also invested in the properties by means of their own funds, personal commitment, due care, and proper conduct of their accounts over the lifetime of the loans are more likely.
The mainstream financial institutions normally prefer that the borrower makes a deposit equal to 20 per cent of the property purchase price. For example, on a loan of $600,000 the required deposit alone –excluding purchasing costs such as stamp duty and conveyancing fees- would amount to $120,000.
However, prospective property investors’ should try their best to come up with the full 20 per cent deposit. LMI is just another added cost and should be avoided where possible.
Furthermore, a bigger initial deposit also saves the investor heaps of interest over the lifetime of the loan. And loan guarantees my complicate future relationships with friends and family.
Some Smart Ideas for Saving Up Your Deposit
The general approach to getting your property loan deposit together as quickly as possible is to regularly put the maximum amount of money away and to achieve the best growth on your savings at the same time.
But, of course, that’s often much easier said than done! Unfortunately the age-old adage ‘no pain, no gain’ is also relevant when saving up a deposit for your property purchase.
Firstly, to re-channel more of your regular income into a growth investment vehicle instead of it getting spent elsewhere –i.e. thereby losing it forever- will require some tough questions -and decisions- from yourself!
Do we really need a second motor vehicle?
Do I need a vehicle at all? How about cheaper public transport and ridesharing instead?
Can’t we just holiday locally for a couple of years instead of going overseas?
Do we really have to go to restaurants every week? How about once or twice a month?
Do we really need both a cable TV subscription and Netflix?
Do I really have to buy lunch and coffees every day? How about packing my own?
Yes, change is often painful –especially initially- but if you keep reminding yourself of the joys of owning your very own property at the end of it, then you’ll stay motivated and determined to push on through.
What’s more, when you first see how the smart financial tweaks in your lifestyle actually start working hard for you by means of a nicely growing deposit balance and by earning interest on top of interest, then the adrenalin, sense of achievement, and growing anticipation will simply keep on skyrocketing you towards day zero, i.e. that very special occasion when you will be ready to make the required down-payment!
Of course, when you start saving up, it’s critically important to know how much money you will need, i.e. set a definitive target and goal. On top of the deposit itself you will also need to pay the regular purchasing costs that are applicable, some of which were mentioned earlier. To figure out an accurate amount to aim for, do your own thorough research, or talk to the property professionals.
And to make sure that your savings amount grows in the fastest way possible –but still safely- also perform in-depth research in terms of the best performing options out there. Or, consult your financial adviser.
At the very least, you should be aiming at a savings account that pays top interest. But, seeing that you are likely going to need a year, two, or three to reach your goal, investing in a managed fund might be a great option too!
There are more than 11,000 managed funds in Australia and the top performers have achieved an average annual growth of 10-25% measured over three years.
When compared to the 2-3% interest typically paid by institutional savings accounts, the inclusion of mutual funds in your investment portfolio might help you reach the required savings goal much sooner.