HOW DO DEPOSITS WORK FOR FIRST-TIME BUYERS?
Buying a home is a long-term financial commitment. It can feel a bit daunting to consider how to afford the monthly home loan repayments, especially if you are a first-time buyer. But, it is possible to lessen this expense by paying a deposit. In addition to increasing the chances of your home loan being approved, there are many other reasons why a deposit will benefit you as the buyer in both the short and long term.
Are first-time buyers required to pay a deposit?
To try and make it easier for first-time buyers to enter the market, financial institutions have become more willing to grant a 100% home loan, which means that you might not be required to pay a deposit on your home loan.
That being said, some sellers make it mandatory for the buyer to pay a deposit (albeit a small amount if that is all the buyer can afford) and will stipulate this in the offer to purchase. This just provides the seller with more security that the buyer is serious and can afford to go through with the purchase. Buyers need to read the OTP carefully to make sure they are not caught off guard by this, as the sale will not go through until the required amount is paid.
What if I can’t afford to pay a deposit?
Even if you don’t have to pay a deposit, it is important to understand that there will be bond and transfer costs above and beyond the asking price that will be payable upfront. This usually amounts to roughly 10% or more of the asking price. If you do not have this amount saved, you will either need to apply for a 110% home loan or take out a personal loan to cover these upfront costs.
How much of a deposit do I have to pay as a first-time buyer?
In most cases, a good deposit is usually around 10-20% of the seller’s asking price. However, you can pay more if you are able to and could possibly negotiate to pay less if you are unable to afford this amount. The higher your deposit, the lower the amount you will need to borrow from the bank and the better your chances are of qualifying for the remaining home loan amount that you require. Having a good deposit saved up will also increase your chances of the bank granting you a more favourable interest rate on your home loan, which, as a consequence, will make your home loan repayments more affordable each month.
Why should I pay a deposit?
Providing a deposit will show both the seller and lender that you are serious about buying the property, with an added benefit of a possible lower interest rate on your home loan. The bigger the down payment, the lesser the loan will be that needs to be repaid. This will also reduce the monthly installment amount.
To whom do I pay the deposit?
The deposit is not paid directly to the seller but rather to the transferring attorney, who will then place it into a trust account where it will be kept safe until the property transfer and registration is complete. The interest that is generated by the deposit will be paid to you after registration of the property.
What happens to my deposit if the sale falls through?
If your OTP is contingent on your home loan approval, and for whatever reason your bond is not approved, your deposit will be refunded to you. However, if you withdraw your application, then you could be in breach of the contract and you might forfeit your deposit.
The offer to purchase is a binding contract. If you, as the buyer, are in breach of the contract and it can’t be rectified within a specific time frame, you will lose your deposit and the seller has the right to use it to cover any legal costs that have been incurred from the deal falling through.
Next steps for first-time buyers
Now that you know all about the deposit, let us help you find your dream home. Contact your local RE/MAX office, because nobody sells more real estate than our property professionals.