5% loan deposit? Is it a smart investment strategy?

At Property NXT we are big believers in education first and having genuine conversations with our clients around what’s the best strategy to enter the Australian Real Estate market.  We are uniquely positioned as a Singapore based buyers advisory business assisting both Australian Expats and Foreign buyers to Australia, we have seen it all.   Recently a client (looking at a first purchase) had seen an advertisement enticing them into the idea of buying a property in Australia with a 5% deposit. However, it’s critical to understand the considerations and why banks prefer higher (usually 20% deposits).   Here’s our considerations: These considerations underscore why many lenders prefer higher deposits, as they contribute to greater financial stability for both parties. 

CASE STUDY EXAMPLE FOR PROPERTY

Let’s break down how this looks at an AUD$880,000 purchase.   To compare the financial implications of a 5% deposit versus a 20% deposit on an $880,000 property purchase, we can summarise the key figures, including the loan amount, LMI costs, and total initial outlay.   Assumptions: Based on real life profile.

Property Value	$880,000 SGD
Interest Rate	6.5% (Note: for a 5% deposit current interest rates are 1-1.5% higher) For the example below we will work off the same rate at 6.5%
Loan Term	30 years
Rental Income	4% of property value per year
Lenders Mortgage Insurance (LMI)	For 5% deposit, additional est. $35,000 SGD
Buyers profile	Australian expats.   For Foreign buyers there are very little options available here.

Calculations (SGD): Accurate at time of publication.

Loan Amounts	5% Deposit: $836,000 / ($44,000 Deposit) 20% Deposit: $704,000 / ($176,000 Deposit)
Monthly Repayment	5% Deposit ($836,000 Loan): approx $5,303.22 (Plus LMI Costs est. $35,000)  20% Deposit ($704,000 Loan): approx $4,442.36
Annual Repayments	5% Deposit: $5,303.22 x 12 approx $63,638.64  20% Deposit: $4,442.36 x 12 approx $53,307.00
Rental Income	Annual Rental Income: 4% of $880,000 = $35,200  Monthly Rental Income: $35,200 / 12 approx $2,933.33
Cash Flow	5% Deposit: $2,933.33 – $5,303.22 approx =  -$2,369.89  20% Deposit: $2,933.33 – $4,442.36 approx = -$1,508.03
Annual Cash Flow	5% Deposit: $35,200 – $63,638.64 approx = -$28,438.64   20% Deposit: $35,200 – $53,307.00 approx = -$18,308.00

 There are very few reasons where we would suggest someone enters the market for the first time with only a 5% deposit. The potential reward of property ownership doesn’t outweigh the risk of what can go wrong with a 5% deposit.    The concerns don’t just stop at the numbers above. Other factors include who is the lender? What is the actual interest rate you will have to pay. 8%?  What type of developer is accepting 5% deposits? (note: most don’t).   If you find yourself wanting to learn more, unsure of your budget, have a conversation with Property NXT. We have seen and heard almost everything with our 20 plus years of Australian real estate experience so can help guide you in a direction that will hopefully prove very valuable in the long run.  Reach out to Property NXT or WhatsApp us today and you could be well on your way to securing a valuable asset and realising your dreams ahead of schedule.