Saving enough money for a home deposit is the Holy Grail for first-home buyers.
Often the culmination of years of squirrelling away every spare dollar you earn, reaching that target amount is no small achievement, particularly with house prices soaring in most Australian cities.
But in today’s market, how much do you really need? Do you need a full 20% deposit, or will lenders let you in the door with considerably less?
Contrary to what you may have heard, you don’t always need to save a 20% deposit before the banks will talk to you.
Finance specialist, John Tindall from Accumulus Home Loans in Sydney, says most lenders are prepared to offer loans to buyers with much less than a 20% deposit – some as little as 5%.
On a $500,000 loan, a 5% deposit is only $25,000, but as well as stamp duty, you’ll also have to pay lenders’ mortgage insurance (LMI), which lenders use to mitigate their risk of lending money to someone with little savings.
Tindall says LMI generally applies to borrowers with less than 20% of the purchase price.
“However, there are some important exceptions to this rule of thumb. Some high-density locations such as inner-city suburbs, commercial properties or self-managed super fund investment loans require a 30% deposit,” he says.
The one-off LMI fee depends on the amount being borrowed, Tindall explains. “As the amount you want to borrow increases, so does the LMI. At 95% for a family home, LMI can add up to 5%,” he says.
“This is not necessarily a bad thing if it means getting the property you want or missing out.
“In recent years, clients who have decided to pay it and secure their property have since seen values rise by over 20%. Not good if you missed out! It can be added onto the loan, meaning you have 30 years to pay it off,” Tindall says.
For a $500,000 loan with a 5% deposit, Tindall estimates LMI of about $17,000 for residential buyers.
“Different lenders negotiate different LMI premiums and it can be worthwhile to shop around. A mortgage broker can help with this,” Tindall says.
Of course, in today’s rapidly changing markets, waiting a few extra months to save additional money to avoid paying mortgage insurance might mean that the properties in your price range increase in value by much more than the cost of the insurance.
Mortgage broker and Port Finance Group director Anthony McDonald says you should factor those increases in when making your decision about when and how much to borrow.
“Sometimes it’s better for the customer to go into a property and pay that insurance, knowing that by the time they try and save that money to avoid paying the mortgage insurance, the market’s moved another 10% or 12% and they’re actually behind even further,” he says.
Depending on which state you’re buying in and the price of the home you’re purchasing, first-home buyer concessions can shave off many of the extra costs normally associated with buying a home.
In Victoria, there’s no stamp duty payable on any property purchased up to $600,000, and a sliding scale of concessions on properties valued between $600,000 and $750,000.
For homes worth $750,000 and above, you can expect to pay duties of around 5% of the purchase price – that’s $40,000 on a $750,000 home. Of course, that extra cost can be capitalised (added onto your overall loan), but it will also slightly increase how much you need to borrow, and thus how much of a deposit you need.
McDonald says there are also other, smaller, fees, for things like conveyancing and title transfers. “They might add up to around $2500 for a first-home buyer,” he says.
Each bank has its own set of rules and standards.
McDonald says your personal financial situation will determine how flexible most lenders will be.
“The more you can give the bank, the better, because the less interest you’ll pay. But it does just come down to individual circumstances. How good is your income, how long have you been in your job? You might have just got a good pay rise, so you can afford to make those repayments,” he says.
“The rates and fees are what they are. It’s just a matter of mining through the options to get to the loan that suits your needs.”
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