"How much deposit do I need to buy my first home?"
This is a grey area when it comes to finance. While it seems like a pretty straightforward question, it can be very difficult to get a straightforward answer.
A general rule of thumb is that you should save 20% of the purchase price. This way, you can avoid dishing out thousands of dollars on Lenders Mortgage Insurance (LMI), and your smaller loan is safer for both you and your chosen lender.
You might also hear the acronym 'LVR' thrown into financial conversations and, for those unfamiliar, this can confuse the topic even more. LVR is your Loan to Valuation Ratio ie. the percentage of money you borrow for a home loan compared to the value of the property. The higher the LVR, the higher the risk. The more deposit you have, the lower your LVR becomes.
Aside from the deposit, you also require funds to cover stamp duty, legal fees, establishment fees and the like. So while you may think that you have built a solid nest egg for your deposit, much of this will quickly be chewed up with the associated costs of purchasing.
Buying a house is starting to sound a little bit painful, isn't it? Not to worry, you do have options- all of which have their pros and cons. Let's break these down so you can consider which home buying route is right for you.
Wait, and save the 20%
Gone are the days of borrowing 105% of the house value (we can thank the GFC for that). In the current market, having a 20% deposit is the ideal scenario. Not only is it safer for you (as the less you borrow, the less you are liable for), but the lender can also rest assured that they have ample security on your loan. If you think this is achievable for you, then put on your savings hat, and knuckle down for a period of time- you will thank yourself in the long term.
HOWEVER (and this is a big however as it is a point that many tend to overlook), you need to consider the time it will take you to save. If your desired property is likely to experience considerable capital growth in the next 12 months, waiting until you have a larger deposit may be fruitless. By the time you've saved what was initially 20%, the purchase price may have increased, and you will be left chasing your tail. For a great number crunching example, see here.
Buy now, and pay LMI
Indeed, with Australia's climbing house prices (the median across all capital cities currently sits above $650k), saving the 20% deposit is nearing the impossible for many first home buyers. If you don't think you can achieve this - don't panic, there are other options. Many lenders will let you borrow up to 95% of your LVR, as long as you are willing to pay LMI on top of this. LMI is a one-off insurance payment that protects your lender, in case you default on the loan. This will be calculated as a percentage of your loan amount, and can vary depending on your LVR. As previously mentioned, while it may seem like you are splashing cash for nothing, paying LMI and buying in with a lower deposit can sometimes be a more beneficial option as you can break into the market quicker and start accumulating capital growth.
Try to find a guarantor
This is an awesome method for those who can easily service a loan, but for different reasons do not have money for a deposit (and the other associated costs). You can nominate a third party (usually a spouse or immediate family member) to be a guarantor to your loan. Instead of the bank taking a deposit for added security, the guarantor would offer up their own security (generally utilising the equity in their own home).
This option is not without risk. Say you fall sick, (experiencing a loss of income as a result,) and default on your loan. Your guarantor then becomes responsible for the repayments; if they cannot service these, their security (own home) is at great risk of being repossessed. Therefore, this lending method should be approached with care. It is recommended that the guarantor seek independent legal advice before signing on the dotted line.
If, after much consideration, this option appears low risk, then it can be a great way for parents/family members to help loved ones break into the merciless property market with little to no deposit.
So there you have it. While it is ideal to keep your deposit over 20%, and your LVR under 80, sometimes this is just not realistic. There are plenty more ways to break into the market (ever heard of rentvesting? ) so keep your hopes up, your eyes peeled, and your savings pumping. Contact My Local Broker for some expert lending advice, and to weigh up which option is right for you.