Hi Rodimus
The use of money as a 'deposit' is not to be confused with other terms and conditions of a purchase.
A 'deposit' is only used as money to 'clinch the deal' and is not a legal requirement. The Sale of Land Act limits deposits to 10% but does not mandate that a deposit be paid.
It is important to be clear that the payment of deposits is normal commercial practice but is not law. One important reason to pay a deposit is when a third party, such as an estate agent, is involved. By paying some of the purchase price as a deposit it means the agent can deduct their promised fee from that money and forward the balance of funds at the vendor's direction.
The 80% Loan to Value Ratio is common lending practice but again is not law.
Most, but certainly not all, lenders will insure the loan against default when the benchmark 80% LVR is exceeded. The borrower pays a once-off premium and many lenders will even lend the borrower the money to pay the premium.
Loan to Value Ratios depend on the lender. Some will go to 100% of the Contract price (depending on valuation), many will go to 95% and will lend the insurance premium, bringing the LVR to effectively 97% of valuation.
If you are looking at finding a vendor who is not selling their property to buy somewhere else, or is otherwise conveniently capable and willing to wait some time for 1/5th of the sale price - $20,000 per $100,000 of sale price - then perhaps you will be missing out on properties which suit your needs because the owners want to be paid the full amount by settlement.
And that would be the great majority of owners.
So why not explore the higher Loan to Value Ratio loans? Costs of 6% plus 5% 'gap funds' means you will only have to have about 11% of the purchase price, don't have to get involved with all sorts of complications, and can make offers to buy without having to have all the 'leave money in the deal' negotiations.
You can get pre-approval on loans and the pre-approval is valid for 90 days 'subject to valuation' of the property you eventually buy. This makes you effectively a 'cash buyer' and give you far greater negotiating power than trying to get the owner to finance you to buy their house from them!!
I am not making any comment on what you want to do with the property, simply the mechanics of purchasing properties.
Equally, there are low documentation loans to 90% LVR which do not have a mortgage insurance premium, so you would need 6% costs + 10% gap = 16% in funds / available equity to finance a purchase with a simple residential first mortgage with one lender.
Remember: Buying property is very simple stuff. 'We' have been trading property since Babylon. Financing property is the easiest of all financing because of the prime nature of the security - residential real estate. With some loan products you do not even have to demonstrate serviceability (depending on LVR).
Rodimus, you wouldn't use a hammer to change a light bulb, so instead of doing it the hard way - finding vendors, negotiating deals etc, why not become very familiar with the different types of finance available to you and use the right tool for the job.
Cheers
Kristine
