Should You Use a Big or Small Deposit When Buying a Property?

https://www.youtube.com/watch?v=SJcO8k4lCgo Should you use a big deposit of 20%+ when investing in property or a smaller deposit of around 5 or 10%? There are pros and cons to each which we look at in today's episode. Property Tools Book a Free Property Strategy 0:00 - Introduction0:39 - What everyone else says you should do1:25 - The 4 major considerations1:56 - 1. Lenders Mortgage Insurance3:51 - 2. Market Timing (Getting Into The Market Sooner)5:35 - 3. Risk Profile8:15 - 4. Cashflow11:33 - It's not a clear cut decision12:46 - What is your strategy/end goal? Recommended Videos: May 2020 Update What is Lenders Mortgage Insurance The 2 Year Strategy How To Enjoy Saving Money Transcription: Ryan 0:00let's talk deposits when you're investing in a property should you use a big deposit of 20% or more so you don't have to pay lenders mortgage insurance or should use a smaller deposit somewhere around 5% or 10% so that you can get into the market quicker and maybe expand your property portfolio quicker as well different people say different things but it's ultimately up to you to assess what's going to be best for your situation and your risk profile so in this video we're going to be talking about big deposits for a small deposit what are the pros and cons of each so hey i'm ryan from onproperty helping you and your journey to financial freedom and as definitely people out there that are like no matter what the circumstances you should always use a 20% deposit to avoid lenders mortgage insurance so you don't have to pay that and so i understand that that that makes a lot of sense and we will talk about that more but then you've got people on the other side that say you should use the smallest deposit possible so that you've then got more money to invest in properties also you can get into the market quicker and get capital growth faster and so we'll talk about that as well but i'm just seeing people out there and say you should definitely do this or you should definitely do this no you should definitely do anything ultimately it comes down to you and everyone's goals and everyone's risk profiles and what everyone wants to do is different so in this video we're going to be talking about some of the different pros and cons of each and so you can actually look at yourself assess yourself and decide okay where do i sit on the spectrum and what do i want to do so let's look at some of the major things so the major things we're going to look at firstly going to be lenders mortgage insurance and talk about that because that can be a big cost we're going to talk about cash flow and how the size of your deposit affects your cash flow we're also going to talk about timing the market and we're gonna talk about your risk profile as well so let's start by talking about lenders mortgage insurance now i've done a full video on exactly what this is a couple of years back so i'll link up to that down below but really simply this is insurance that if you don't have a large enough deposit and usually that's 20% on residential property investments if you don't have that large amount of margin off deposit the banks are taking an extra risk giving you a loan and they want insurance to cover that risk in case you have to sell the property and the markets going down and they lose money just to put a disclaimer out there i'm not a mortgage broker or insurance broker but they they charge you this insurance and that's an extra fee that you have to pay either for paid upfront or often it's added on to your loan and so that's an extra fee that you paid to the banks and ensures them against the extra risk they're taking on us then the insurance isn't necessarily for you it's for them so a lot of people see that as a last costs or something that you have to pay that you don't really see any major benefit from so this is why people often recommend that you save at least a 20% deposit i know with building granny flats you might need as much as 30% deposit the same with commercial properties if you're going into rural markets and that can change as well so talk to your bank or mortgage broker about exactly how much you need now i did do i did quickly look online about how much you would have to pay but it can get quite expensive okay so on a $500,000 loan if you have a 20% deposit then you pay $0 in lenders mortgage insurance if you only had a 10% deposit this calculator estimated you'd pay $8.8 thousand or $8,800 and if you only had a 5% deposit then you would have to pay 17 and a half $1,000 in insurance so obviously this is a lot of money that you have to pay and so this is why some people recommend that you go with wait till you can say about the full 20% and avoid this cost so that's one thing to think about but then the flip side of that is if you're able to use a smaller deposit of 5% 10% you don't have to save as much money you can often get into the market sooner so let's use an example of a $500,000 property if you were to save a 20% deposit that's $100,000 that you would need to save i don't know about you but saving $100,000 that's a daunting task and that would take a long time but how about if you can only save a 10% deposit and save 50,000 or 5% deposit and they have to save 25,000 there you have 50,000 or $75,000 that you don't need to save how long is it going to take you to save that extra $50,000 you're taking an extra year an extra two years and what's going to happen to the market in that time if you're looking at a $500,000 property let's say it takes you two years to save that extra 10% let's say the market goes up 10% in that time or goes up even more than that in that time that $500,000 property is now $550,000 in order to get that same sort of property so you kind of lost out on the growth in the market there so some people argue using a small deposit allows you to get into the market faster, which allows you to take advantage of market opportunities. Now at the moment, we're going through a recession, and in some markets, that can actually be a really good opportunity to get in towards the bottom of the market. And to secure a really good property for a really good price before the market grows as the economy recovers from this recession, and from the buyers and everything like that. So there are arguments that that could be better. So you need to assess that for yourself, do you want to avoid that insurance? Do you want to get into the market sooner, and then you also have to look at your risk profile, as well. So getting into the market sooner, that could be good. But that's going to expose you to more risk because you now have a small deposit, which means you have less equity in the property. So let's say using a 5% deposit, you've got 5% equity, or maybe even less after you add the Lenders Mortgage Insurance to the loan, you might have a 3% equity or something in the property. Now, if the market was to go down by five or 10%, very quickly, you're in a negative equity situation, where if you are forced to sell that property, you will actually lose money on that property. And you would not be able to pay off the full amount of your loan from the sale proceeds of the property, which means you'd sell the properties still have a chunk of debt leftover. So being in a negative equity situation, obviously, not very desirable. If you've got 10%, then you've got a bit more wiggle room there. But if you've got that full 20%, then you've got a lot more wiggle room to work with looking at when the market peaked in 2017 in Sydney, and Melbourne. And then we saw the declines in those markets in 2018, down to mid 2019, we saw about a 15% drop in those markets. Now, some suburbs dropped more, some suburbs dropped less than that. But 15%, if you were to invest with a 20% deposit, and you're forced to sell your property, you still wouldn't be in a negative equity situation. And we've got ash falling from the sky at the moment, because they're doing some backpacking around here in the National Park hopefully to avoid the bushfires that we saw earlier in the year. But it feels like back in bushfire season when ash was falling down there. So you got to look at your risk profile. And what you think's going to happen. Now, obviously, at the current stage of the market, the current stage of the economy is probably riskier than other times when we just clearly come out of a recession. And we're in boom times ahead and lending law super favorable. So right now we're in a turbulent time where it's unclear exactly what's going to happen in the market. And I have done an update video on where I think the markets going by looking at the data at the moment. So I'll link up to that down below as well if you want to say, okay, what's the data telling us what what are riskier areas than others? I'll link to that down below. So you need to look at your risk profile there. So it talks about Lenders Mortgage Insurance and avoiding that or having to pay that. And obviously, the benefit of having a smaller deposit means you can potentially get into the market earlier. So I guess there's pros and cons to both of those, that then increases your risk profile if you use a lower deposit. Because if the market drops, you're faster, you're going to go into negative equity faster. And then the last thing to think about is cash flow, and how this is going to affect your cash flow situation. Because if you're using a larger deposit, then you're going to have a lower mortgage on the property. So let's use our real basic example of a $500,000 property. If we're using a 20% deposit or putting down $100,000. Let's just assume that, you know, we're paying for all their extra expenses like stamp duty and stuff, real basic example not financial mortgage advice here, or accurate, but it'll give you an idea. That means 500,000 minus a deposit of 100,000. That's $400,000.