Knowing how much to save for a deposit is a great way to stay disciplined and on track to meet your homeownership goals. Here is some information to help you find the magic number.
Calculate Your Borrowing Power
Your deposit depends on the price of the property you are buying. Calculating your borrowing power in advance helps you lock in a budget for your purchase, bringing you one step closer to figuring out your deposit amount.
Borrowing power calculations guide a lender to believe it is affordable based on income, financial commitments and living expenses. You do not need to borrow the total amount – it is vital only to borrow what you are comfortable with.
The Deposit Amount
When talking about deposits, you often hear terms like LVR and LMI. What are they?
LVR – Loan to Value Ratio
LVR is the percentage of your loan against the property’s value. Most standard home loans are based on borrowing up to 80% of a property’s value, which means you will contribute a 20% deposit.
Many lenders are happy to consider applications with as little as a 5% deposit (95% LVR). However, they will cover themselves for the risk and make the borrower pay Lenders Mortgage Insurance (LMI).
Government Schemes also provide an opportunity to borrow up to 95% without paying LMI. If you need to know more about these Schemes, speak to ASA Mortgage Brokers mortgage specialist.
LMI – Lenders Mortgage Insurance
LMI is an upfront premium you pay that protects the bank if you default on your repayments. This is not an insurance policy for borrowers – you will still be liable for your debt. LMI premiums are tiered based on property value and LVR. The higher the LVR, the more you will pay. Some lenders will allow you to add your LMI premium to your loan, increasing the interest you pay over the home loan term. In addition, some lenders may charge a “risk fee” instead of LMI depending on the LVR.
Buying With a Smaller Deposit
We would all start our property journey with a 20% deposit in an ideal world. But unfortunately, with ever-increasing property prices and living costs, this option may not be feasible for many home buyers.
If you aim for a smaller deposit, your home loan amount will be higher. You must submit a robust application showing stable employment, evidence of savings and a history of meeting your financial commitments. Both the lender and the mortgage insurer will review your application to assess the risk of lending to you.
Benefits of a More Significant Deposit
There are some advantages to holding out for a bigger deposit.
- Greater choice of lenders
- Less to borrow upfront
- Reduced or no LMI added to your loan
Additional Purchase Costs
In addition to saving for a deposit, you will also need funds for costs associated with the purchase.
- Home loan application fee
- Building and pest inspection
- House and contents insurance
- Mortgage registration
- Stamp duty
- Conveyancing fees.
Depending on your state and previous property purchases, these costs could add up to 5% of the purchase price.
Boosts for First Home Buyers
First Home Loan Deposit Scheme
First home buyers may be eligible for the federal government’s First Home Loan Deposit Scheme (FHLDS). Under this scheme, the government guarantees lenders, so you do not need to pay LMI. However, places on the scheme are limited, and you will need to meet the eligibility criteria to be accepted.
First Home Owner Grant
Some states still offer a First Home Owner Grant (FHOG) to first-time home buyers building a new home. The grant value and eligibility criteria vary from state to state, so check out the FHOG website for each state for more information.
Finding a Loan That’s Right for You
With access to a wide range of lenders happy to consider applications with smaller deposits, ASA Mortgage Brokers will find one that works for you. So get in touch with us today to discuss your home loan needs. Contact us today.
This article is prepared based on general information. It does not consider individual financial objectives or needs and is not financial product advice, and the content is quoted from the Yellow Brick Road Blog.