Should we scrap the 20% deposit? An Interesting Discussion

The goal post to a 20% deposit shifts every time house prices do. It can be disheartening for anyone who has been trying to save for a house deposit in the last few years.

Let’s assume for the sake of this discussion that the government scheme spots are not available. In fact, for many home buyers, they’re not. If you are trying to rebuild your life after losing your home to divorce, financial hardship or just having to sell shortly after buyer to relocate, this is your reality. You can’t qualify for 10 years so you are starting from scratch without deposit support.

This leads me to question the need for a 20% deposit. In a perfect world, I would love everyone to borrow as little as possible and aim to chip away at the mortgage until they own their home without answering to any corporations. However, most people are not likely to be cashed up enough to do that and rent keeps rising.

The case to end 20% deposits Do banks need a 20% deposit? In my opinion, not anymore. The point of the 20% deposit was to allow the bank to ‘fire sell’ your property cheap and cover the interest, fees and legal costs accrued while pursuing the delinquent mortgage. When homes were $300k, a $60K deposit didn’t seem like much wiggle room. Now with an average price tag of around $950K for an Australian property, will the bank really lose $191k with interest, fees, legal and selling costs? Maybe the answer is yes, maybe banks could provide and potentially inflated itemised list where the house they had to sell cost them $200K. What about the other 99% they don’t need to sell? What about the multi-billion-dollar profits, I don’t believe a 10% deposit would have any impact on these. In fact, their profits may increase as people end up borrowing more and paying more fees and interest.

Banks are more protected than ever! With lending regulations stronger than ever, and for good reason, consumers are not the only ones protected. Lenders are also covered with extra cushion when it comes to assessing your loan. A 3% buffer and shading of certain incomes means it is less likely they will need to pursue you for defaulting. The predatory lending practices of the past which saw banks lend to high-risk clients have, for the most part, been weeded out. Lenders used to look at a high amount of equity as a golden ticket whereas now servicing has taken over.

Lenders already exercise LMI waivers for certain clients lending 90% without Lenders Mortgage Insurance. These are only offered to certain professionals such as doctors, lawyers and bank staff to name a few.

I think a 10% deposit and a backup plan for hardship (such as protection insurance) would be a better representation of where today first home buyers sit.

The downside The downside of course, is people getting into trouble. Not so much with buying their first home as they worked hard to get it and will work hard to keep it, but my concerns would be more equity to use your home as an ATM. I strongly believe borrowing money against your home needs to be seen as an extreme measure. Not for things we want. I have seen countless home loan increases for new cars, boats, caravans, school fees, starting a business, cosmetic renovations, consolidating credit cards instead of changing spending habits even for entertainment centres and photography equipment. In some cases, extreme measures may be needed. However, we need to shift the way we see debt, take responsibility to pay it off quicker and avoid extending the loan term when refinancing. Banks are happy for us to take 40 years to pay off a loan, they make more money. You need to have the discipline to make sure they are not squeezing every cent they can from you.  

Will consumers have the discipline to resist the urge to ‘keep up with the Joneses’ and live the unglamorous life of paying down their mortgage to a less stressful and carefree lifestyle. Afterall, the joneses may spend their boating and caravanning holidays arguing about money in between their perfect Instagram photos. I would rather the peace of a debt free home. As for me and my house, we will serve the Lord.

Romans 13:8 “Let no debt remain, except the continuing debt to love one another…”