What do I do with my deposit once it's saved?
If you’ve put in the hard work, tightened your belt and finally saved up a deposit, congratulations! You’ve overcome one of the single biggest hurdles to homeownership.
Once you’ve got that chunk of cash sitting in your account, how do you actually turn that into buying a home?
In this part of the guide we’ll explore the steps you need to take to make your home-buying dream a reality.
Before you go house hunting in earnest, it might be useful to get home loan pre-approval. Pre-approval will help you get a handle on the kinds of properties you’ll be looking for and how far your home loan deposit will go.
What is pre-approval?
Pre-approval, or conditional approval, is the very initial stage of your home loan process. This happens when you submit your home loan application and supporting documents to verify your identity and income, and the bank tells you how much it will be willing to lend you.
Now it’s important to note, pre-approval is really just the lender saying that, given the information you’ve provided, you can borrow a certain amount. It’s the lender’s first impression of your application. It’s highly likely that the lender has just run your application through computer models to spit out an amount you’d be likely to qualify for. In many cases, a human being hasn’t actually assessed your application.
To move from pre-approval to full approval, the lender will have to verify all the information you’ve supplied, have a valuation done on the property you’re buying and determine whether or not you’ll need lenders mortgage insurance (LMI).
If you do need LMI, an LMI provider might even have to sign off on your application before it’s fully, or unconditionally approved.
When you’re handed a pre-approval, just remember: the lender isn’t actually obligated to give you a home loan.
Why should I get pre-approval?
If pre-approval is so tenuous, why even bother?
There are a few reasons why it’s important to get pre-approval before you start looking for a property:
- It gives you a good idea of the price range you’ll be looking at. If you’ve got a $100,000 deposit saved and the bank says they’ll approve a $600,000 home loan, you probably don’t want to waste your time looking at million dollar properties.
- It lets you know how far your deposit is likely to go. As in the example above, if you’ve got $100,000 on hand and a bank says it will lend you $1 million, you have to decide how expensive a property you feel comfortable buying. Are you happy to have a deposit of 10% or less and end up paying for LMI, or will you look for a cheaper property? Do you have enough to cover stamp duty? Pre-approval helps answer these questions.
- Pre-approval is a handy weapon to have when you go to auction or make an offer on a house. If you’re pre-approved for a certain amount, sellers know you’re serious. They can feel more confident that, if you make an offer on their property, you’ll actually be able to get a home loan to cover it. This can give you a serious edge on other potential buyers.
How do I know if pre-approval is reliable?
It’s very important to know when a pre-approval is trustworthy. Some lenders try to woo borrowers with instant pre-approvals, but these are often worth very little. Only trust a pre-approval if you’ve actually signed and submitted a home loan application with supporting income documents.
Finding a property
After you've gotten pre-approval and have some idea of the price range you'll be looking at, it's time to look for properties. The best place to start might be getting an idea of the area where you want to buy.
This is where tools such as domain.com.au and realestate.com.au can come in really handy. In addition to property listings, both sites also offer suburb data. You can search to find profiles of different suburbs that include not only median price data, but also data about schools, transportation, amenities and even things like median age and education level.
Pinpointing the area in which you want to buy will narrow down your property search. Now you can focus on finding a property that fits your needs. You'll need to make decisions like whether you want a house or a unit, how many bedrooms you're after and whether you want a property you'll need to do some work on or one that's ready to move into.
Going to auction
Once you’ve got your deposit, home loan pre-approval and an idea of your price range and the type of property you're after, it’s time to go house hunting. This can be a pretty stressful process, and in all honesty you’re likely to lose out at a few auctions before you finally score a home. Don’t get discouraged, and don’t give up. You’ve come this far after savings your home loan deposit. You’re now close to your home-buying dream.
How to prepare
Before you attend an auction, make sure you prepare yourself by learning everything you can, not just about the property, but about the auction process.
Head to some auctions as a spectator to get a feel of the kinds of buyers you’ll be competing against, what the bidding process is like and what you can expect when you get to auction. This way, when you attend for a property you actually want to buy, you’ll feel much more confident. It also helps if you have a good feel for the property and its potential price range. Look for similar property sales in the area ahead of the auction.
Listen to some expert advice from professional buying agents
Tips for securing the winning bid
Once the bidding starts, there are a few strategies you can use to improve your chances.
- First, start low. Don’t be overly eager, since that might cause you to inflate the property’s price.
- Second, know your limit and stick within it. Pre-approval will give you a good idea of the size of home loan you’re likely to get, and your own budgeting will show you how big a repayment you can comfortably handle. Don’t be drawn outside your comfort zone and potentially put yourself in mortgage stress.
- Third, call out your bids with confidence. Make sure to let other bidders know you’re not going to be scared off.
- Finally, don’t rush. Taking some time between bids can put a bit of pressure on the sellers, particularly if they’ve set their reserve too high.
Paying your deposit
If you’re fortunate enough to win at auction, it’s finally time to put that home loan deposit to use. So, what exactly do you do with it once it’s time to pay?
When do I pay?
You’ll need to pay your deposit immediately after the auction. This means you need to attend the auction with your payment ready. This is generally around 10% of the purchase price. Also, make sure you sign contracts when you hand your deposit over. Until the contracts are signed, the seller technically has the right to accept another offer.
What payment form should I use?
You can use either a personal cheque or a bank cheque. Some sellers might prefer a bank cheque. Obviously, the problem with this is that you won’t know the final purchase price until after the auction, and so won’t know the amount you need to write on the cheque.
Fortunately, most banks will issue a counter cheque with the name and amount left blank. This means you could attend multiple auctions without having to get a new cheque issued, and only fill out the name and amount once you win.
If you have money temporarily tied up somewhere else, such as in a term deposit, you may also consider a deposit bond. A deposit bond is a guarantee issued by either your lender or a third party that covers up to 10% of the purchase price of the property, and guarantees the vendor funds in the event that you don't complete the sale.
Deposit bonds do charge fees, so make sure you factor this in if you decide to use one. Also, you'll need to make certain the vendor of the property you're buying will accept a deposit bond. You can learn more about the ins and outs of deposit bonds here.
What if I change my mind after I paid the deposit?
Thankfully, most states and territories offer cooling-off periods. This means you have a set amount of time to change your mind and recoup most of your deposit.
Note that we said “most” of your deposit. This is because you will have to forfeit some of it to compensate the seller for the time and trouble of re-listing the property.
These cooling-off periods vary from state to state, as does the amount of deposit you have to forfeit. Here’s a rundown:
- ACT. In the ACT, you have five business days to change your mind. You’ll forfeit 0.25% of the purchase price of the property.
- New South Wales. Like the ACT, the cooling-off period in New South Wales is five business days, and you’ll forfeit 0.25% of the purchase price.
- Northern Territory. In the Northern Territory, there’s a four business day cooling-off period, but only if you aren’t represented by a conveyancer or solicitor. Fortunately, you won’t forfeit any of your deposit.
- Queensland. Queensland also has a five business day cooling-off period and penalises you 0.25% of the purchase price.
- South Australia. South Australia has a very short cooling-off period of only two business days, but buyers only forfeit a maximum of $100.
- Tasmania. If you buy a home in Tasmania, you better be sure you’ve made the right decision. The state doesn’t enforce a cooling-off period, which means a seller would have the right to force you to proceed with the sale.
- Victoria. The cooling-off period in Victoria is three business days, and you’ll forfeit 0.2% of the purchase price.
- Western Australia. Like Tasmania, Western Australia does not have an officially enforced cooling-off period.
So we’ve walked you through the home loan deposit process from the very beginning all the way through to the purchase of your home. Congratulations! But what if saving an adequate deposit just isn’t feasible for you? Well, we won’t leave you out in the cold. In the next section, we’ll discuss a couple of solutions, including no-deposit home loans.
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