5% deposit

[ProperTee]

I'm finally able to save funds for a deposit to get back into the property market. I have been told by a broker that these days lenders will lend up to 95% with LMI. I asked him about the normal 10% deposit required on exchange and he said that in the current market, vendors are more willing to accept a lower deposit, say 5%, as it makes little, if any difference to them once settled. This all makes sense to me, but I'm just wondering if anyone here has had recent experiences with low deposit purchases and would like to share their thoughts.

Many thanks.

 

[Aaron_C]

I'm finally able to save funds for a deposit to get back into the property market. I have been told by a broker that these days lenders will lend up to 95% with LMI. I asked him about the normal 10% deposit required on exchange and he said that in the current market, vendors are more willing to accept a lower deposit, say 5%, as it makes little, if any difference to them once settled. This all makes sense to me, but I'm just wondering if anyone here has had recent experiences with low deposit purchases and would like to share their thoughts.

Many thanks.

Yes most vendors/agents will accept 5% because it's still sufficient hurt money if you pull out of the contract. Technically in contract law even a $1 deposit will make a contract binding.

 

[Propertunity]

We often negotiate a 5% deposit on exchange (including auctions) and have never been turned down yet. I think you'll find that under the terms of the contract, the vendor can still sue you for the other 5% if you pull out anyway.

So no issues really.

 

[evand]

As long as the deposit covers the RE agents comission (which 5% does) everyone's happy. Even the agent.

 

[Rolf Latham]

Hi PT

Not many will say no on 5 % in NSW...........especially if the property u are looking at is "target market" FHOG, many of which dont have more than 5 %

Some solicitors will encourage their sellers to not accept the 5 % and push for a 10 % deposit bond, which is a pain but usually doable

ta
rolf

 

[jacbmw]

Even with a 5% bank deposit u still need almost 5% in purchases costs. In my latest 95% purchase, i just shiffed the ~5% left over from deposit into purchase costs at settlement. worked nice and neat

 

[ProperTee]

Thanks to all for the helpful info. Rolf, I'm not clear on how a deposit bond works. I assume it's similar to a bank guarantee, where they essentially lend you the money without actually advancing it, but guarantee to the vendor that they will get the deposit should I bail out?

 

[Propertunity]

Thanks to all for the helpful info. Rolf, I'm not clear on how a deposit bond works. I assume it's similar to a bank guarantee, where they essentially lend you the money without actually advancing it, but guarantee to the vendor that they will get the deposit should I bail out?

Correct, except a DB is issued by an insurance company.

 

[ProperTee]

Ah, I understand. So would it operate much like LMI? ie. vendor protected, but insurance company then sues me? Any rough idea on costing?

 

[Jamie M]

Hi PT

If you can't settle the purchase - the vendor gets the 10% and the insurance company gets it off you.

You can get an idea of costs here https://www.depositpower.com.au/webapp/depositpower/guaranteeQuote.do?country=au&brand=vero

It's much easier if you can just get the vendors to simply accept 5%

On another note - if the deposit/purchasing costs are on the slim side then you may want to go with a lender who won't cap LMI at 97% (I'm not sure which lender you're with).

Cheers

Jamie

 

[ProperTee]

This is becoming very interesting.
So, let me run through an example to make sure I understand.

Can I do this?

• Purchase price $250k
• Lender wants to see savings 5% - $12.5k
• Stamp duty and other costs say $10k

1. Get a loan pre-approval.
2. Get a DB for about $300 and use the $12.5k savings for stamp duty, etc.
3. At settlement, the deposit bond is covered by the lender's advance.

In other words, with a $300 DB, I only need to save $12.5k (plus cost of DB) instead of about $25k. Is that right?


*** Just realised ***
Lender will only advance 95%, so still need to find the other 5% plus LMI. I was getting quite excited for a brief time there.

 

[jacbmw]

Assuming it is 95% + LMI, wouldnt mean u need to save $12.5k + purchase costs (ie. stamp, convey. etc) so prob closer to $22.5k???

Just cause there is the deposit bond, this is only pre-settlement and relating to the deposit given to the vendor. You still need to pay deposit of 5% to bank. plus costs to Mr Tax man.

 

[Aaron_C]

Lender will only advance 95%, so still need to find the other 5% plus LMI. I was getting quite excited for a brief time there.

There are lenders out there that will let you add the LMI to your loan even at 95% LVR for a good rate.

 

[Ed Barton]

YTechnically in contract law even a $1 deposit will make a contract binding.

wouldn't no deposit even make a contract binding, all else being equal?

 

[Propertunity]

wouldn't no deposit even make a contract binding, all else being equal?

This is an interesting point of law. It goes to whether a contract can be formed or not without the payment of some 'consideration'.
Perhaps a soli can answer?

 

[Jacque]

I believe that some form of "deposit" money needs to change hands to validate the contract. Years ago we exchanged post-auction on a $1 deposit.

5% deposit is fairly well accepted but don't assume it's always so. We've had quite a few vendors over the years who've insisted on 10% but have conceded on other terms so it all works out if both parties can agree.

 

[Ed Barton]

This is an interesting point of law. It goes to whether a contract can be formed or not without the payment of some 'consideration'.
Perhaps a soli can answer?

consideration doesn't need to be a deposit cheque.

consideration can be a promise

 

[Michael A]

For a contract to be binding there needs to be an offer, acceptance and consideration. The actual exchange of the physical document is enough to be considered consideration. There is legal precedence to support the exchange of contracts as the consideration. Having said this it is easier to enforce if actual cash changes hands.