With property prices climbing at a head-spinning rate in some parts of Australia, many prospective first home buyers feel they are facing not just a brick wall but a towering cliff when it comes to saving the deposit required to get finance to buy a home.
If you’re in this position, you may have been saving for some time – only to find that your carefully nurtured lump sum is no longer sufficient as house prices have moved upwards yet another notch.
While at least 20 per cent of the purchase price of a property is desirable as the deposit, there are ways to abseil over the cliff, as long as you have sufficient income to service the home loan and meet the regular repayments.
Be aware of Lenders Mortgage Insurance
Some lenders will require a deposit of as little as five per cent of the purchase price. Of course, there is a catch.
If you borrow more than 80 per cent of your home’s value you will be required to pay lenders mortgage insurance (LMI) which can cost many thousands of dollars and protects your lender, not you.
Some lenders may allow you to add the LMI to your home loan, allowing you to pay it off over time rather than upfront but you need to be absolutely sure you can service the larger repayments. Your Online Home Loans broker can help with this.
Factor in your purchase costs
Keep in mind also that, as well as the deposit, you will need to save for purchase costs such as stamp duty and legal fees. On a $500,000 property, for example, upfront purchase costs will be around $25,000. We have an article that discusses these costs that is definitely worth a read.
While saving for a 20 per cent deposit will save you money on mortgage insurance, you need to weigh up how long it will take you to save the additional funds against whether property prices will increase in the meantime so you end up right where you were again!
Keep in mind also that going ahead with purchasing a home as soon as you are able means that you will stop paying rent sooner and you may recoup the costs of LMI in the capital growth in your property.
So the advantage of a smaller deposit is that you will own your own home sooner, however if you choose to wait until you have a 20 per cent deposit you will be rewarded with a smaller home loan, lower monthly repayments and higher equity (the value of your home above the mortgage amount) in your home.
Could you ask for family assistance?
Another option is for a parent or family member who owns a property to act as a guarantor on your home loan. In this case, you may not require a deposit at all but you are taking on a large responsibility and need to be absolutely sure that your income is secure and you will not default on any repayments. In the worst case scenario, your parents or other benefactor could lose their own home.
Remember also that you may be eligible for a First Home Owners’ Grant. These vary in amount and requirements for eligibility according to which state or territory you reside in and are usually not paid until after your property purchase is finalised.
However, knowing the amount you could receive will assist you with your planning and with securing a home loan.
What happens when you buy a second home?
Home buyers moving on from their first, or subsequent, home will also need to place a deposit on their new home, usually 10 per cent of the purchase price payable on exchange of contracts.
In this scenario, if you don’t have the cash until settlement on the sale of your current home you can request a Deposit Guarantee from your lender. This is basically a promissory note from your lender guaranteeing that the deposit will be paid on settlement of your sale and will cost you around $300.
Another common deposit option is a Deposit Bond. It acts very much like a Deposit Guarantee, but is supplied from companies outside of the banks. These companies usually have a large international insurer behind them and you will need to show (in most cases) that your loan is approved for the Bond to be issued. The cost for these is determined by the settlement/sunset clause date.
If you would like to know more about home loan deposit requirements, or think you may have enough saved to make your move and buy a home, simply fill out our contact form and one of our home loan experts will be in touch to make an appointment for a video meeting at your earliest convenience.
Alternatively you can jump straight in and start the whole process by completing our “Find My Rate” quiz.
We are here to help!