Why Deposits Matter?
I began investing after the Global Financial Crisis when the bank’s in Australia were only asking for a 5% deposit. At the time I was un-educated, living at home and young. I was 24 years old and did not understand the risk or downside of putting down a small deposit.
Fast forward to 2018 and the banks are asking for 10-20% deposit. New Zealand has recently had a policy change and now require a 30-40% deposit from investors. At different times of the cycle and in different countries policies are constantly changing. The options we have today won’t always be the same in 5 years or 50 years from now. Sometimes money is easy to access and sometime it is harder.
Positive’s and Negative’s of Large Deposit
- Avoid Lender’s Mortgage Insurance – If you have less than 20% deposit most lenders will require LMI which can be expensive and is an added cost of entering the property market. When considering LMI, keep in mind the threshold can make a big difference to the amount you pay. You can also add this into your total loan and don’t have to pay it upfront
- Improves cash flow position – with a higher deposit the total debt and cost of your debt is reduced
- Reduces the risk – at certain times in the Australian Property Cycle property prices can decline
- It is difficult to save 20%
- It can stop you from entering the market and the potential damage of time spent out of the market can be significant
Positive’s and Negative’s of Small Deposit
- Many Australian’s have equity in their own home they can use as a deposit
- It is easier and quicker to save
- Enables you to get into the market as opposed to sitting on the side lines
- Australian lenders are open to smaller deposits currently
TIP: When you are considering purchasing a property with a smaller deposit it is key to ensure you are buying a high quality product, in the right market and at the right price.
- Hurts cash flow
- High exposure
- It can stop you from moving forward with other loans
- Your lender options are reduced
Tip: Time the Cycle
It is dangerous to buy a property at the top of the cycle, this is especially important if you have a small deposit. Herron Todd White provide a Month in Review report which indicates each Australian market and it’s current stage in the property cycle.
Where You’re at in the Investment Cycle
Accumulation Phase – low deposit
This is where you will target high quality properties to set yourself up for financial independence, It is common to use a low deposit to enable you to buy more properties quickly.
You are likely to be buy multiple properties in this phase with the intention to sell one in 15 years to pay of another and have the cash flow for life.
I discuss the different stages of the investment cycle in my popular blog: 4 Properties To Financial Independence
Consolidation Phase – high deposit
This is where you’re focus is on good cash flow properties and debt reduction. You will have good equity in your properties and in this phase be looking at putting down 20% deposits.
I hope I have been able to offer you some food for thought today. I am not a financial advisor and I recommend you speak with your financial advisor or mortgage broker about the above options.
To book a complimentary strategy session with the team at Pumped on Property click here. We would love to spend some time learning about where you are right now and where you’re looking to go in the future.