The difference in cost between a 10% deposit and a 20% deposit is significant. Even with a mortgage of $400,000, the difference in cost can be near $10k per annum in the first year and around $4,000 per year every year after that. That adds up!
It occurs to some people that borrowing money to get them across the line (whether it’s the 10% or 20% line) is an option.
Let’s look at an example of a $500,000 purchase for an existing home (not a new build). The minimum deposit required is 10% or $50,000. But what if you only had $40,000. Could you borrow $10,000 from a finance company to cover the shortfall?
The answer from every single bank is a resounding no. One of the things that banks look at in your application is how the deposit was acquired. Not only is this important for Anti-Money Laundering (ie; did you get the money through illicit means) but it also speaks a lot about your ability to manage your savings. The banks ideally want clients that avoid debt rather than get into it.
Not everyone agrees with this sentiment from the bank. After all, it is reasonably common to borrow money to buy a business. And a business would seem to be riskier than a property which has far more of a liquid market.
So what's the harm of racking up a bit of Credit Card or finance debt in order to save tens of thousands on a mortgage?
Well, the main problem is the repayments on finance debt. They are usually on a 5 year term which requires significant amount of cash to pay (especially when it's a large part of your mortgage).
And if your argument is that you have plenty of income, the bank's response is typically to ask why you don't have the deposit through savings?
Well there are a couple of options:
There are plenty of ways to increase your deposit but raising finance isn't ideal. It puts a strain on cashflow at a time when paying your debt has significantly increased through a mortgage. When you apply for a mortgage, the bank requires 3 months worth of savings statements and if the bank sees a deposit that corresponds to a new amount of short-term finance, it's likely your application will struggle to be approved.
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