How do mortgage deposits work

When you’re buying a new home, you have to put aside a significant amount of money even before the mortgage starts. The deposit amount usually lies in the range of five per cent to 20 per cent of the mortgage. You can put down more if you have available funds.  

The minimum deposit is essential for lenders to approve your home loan application. As a deposit is an essential part of the process, these loans are often known as deposit paid  mortgages. 

Your parents and relatives may help you by contributing to this down payment. If it is a gift, then you will have to give the lender a gift deposit letter as proof. 

A larger initial deposit can help to lower your monthly repayment. You may also be able to negotiate better interest rates if you can manage a higher deposit. 

If you are unable to put together a 20 per cent deposit, then your lender is likely to insist that you purchase lenders mortgage insurance. Lenders mortgage insurance or LMI ensures that the lender can recover the loan amount in case the borrower defaults. The premium charged for LMI depends on the deposit paid mortgage amount, your credit score and the future equity of your house. 

Apart from the above, you will also need to arrange for money to pay for solicitor fees, stamp duty, bank fees and any other costs associated with your purchase.

As deposit paid mortgages can only be taken out after you pay the initial deposit from your pocket, the deposit doesn’t really count towards your mortgage repayments. 

On the other hand, the higher the deposit, the lower the loan you have to take. So the deposit indirectly counts towards the mortgage.

Paying a larger portion of the purchase price reduces the risk for the lenders. So they may be more willing to approve your home loan application.

The stage at which you need to pay the deposit amount is somewhat flexible in private sales. Once your offer has been accepted, you can discuss it with the real estate agent and the vendor to agree on a suitable date.  You will have to arrange the deposit amount as well as prepare the mortgage documents before the due date. 

In the case of auctions, you will have to pay the deposit amount once the auction ends. The deposit amount is typically five to ten per cent of the winning bid. However, just because the seller is satisfied with a lower deposit doesn’t mean the lender will waive off the 20 per cent deposit requirement. Unless you’re eligible for a professional package home loan, your lender will most likely charge you Lenders’ Mortgage Insurance (LMI) if your deposit is less than 20 per cent of the property’s price.