:::note Timeless Principles
While this case study uses examples from 2023, the underlying principles remain exactly the same today. Being slightly short of the 20% deposit threshold still triggers disproportionate costs, and the solutions-family gifts, timing adjustments, or negotiating purchase price-are just as relevant now. The specific numbers may differ, but the lesson endures: always calculate your deposit requirements carefully before making an offer.
:::
This case study examines Bill and Hillary, a couple whose home purchase offer was accepted at $800,000, but their deposit fell short of the ideal 20% threshold at 19.7%. They were "$2,400 short of the ideal 20% deposit."
The Cost of Low Equity
When buyers have less than 20% equity, lenders impose additional fees or interest rate increases-in this case, 0.25% added to the mortgage interest rate. The financial impact was substantial: "Bill and Hillary are going to have to pay an extra $5,632 in interest and/or fees because they are short on their deposit by $2,400." That's a cost of 234% relative to the shortfall amount-paying $5,632 extra because they were $2,400 short.
Proposed Solutions
Solution 1 – Credit Cards: Though borrowing $2,400 on a credit card at 20% interest would cost far less than the $5,632 low-equity penalty, banks view borrowed deposits negatively and may flag the application.
Solution 2 – Family Gifts: A formal gift certificate from family members is acceptable to lenders and avoids the penalty entirely.
Solution 3 – Delayed Payment: Waiting for the next pay cycle is viable if timing permits, though it depletes emergency savings reserves.
Recommendation
The article recommends prioritizing family assistance, followed by the delayed payment option. These approaches allow clients to "save the client over $5,000 in additional costs" while maintaining financial flexibility for settlement-related expenses.
Need Help With Your Mortgage?
Our expert advisers are here to guide you through every step of your mortgage journey. Get in touch for a free, no-obligation consultation.
Talk to an Adviser
