How much deposit do I need?
Borrowing money and (Home) deposit levels is not an exact science so there is no ‘one size fits all’ when it comes to securing your own home.
But this topic is really important to aspiring young people like you so the team here at Vault Plus Mortgages will do our best to make things much clearer for you here and start you on that most rewarding path to home ownership.
So I reckon if we work with a minimum amount of 10% (deposit) of the purchase price as a general rule we wont be far away. So for example if you are considering buying your first home for $600,000 then you will usually need $60,000 as a minimum.
Yes there are people that say you need 20% deposit and ‘the world will stop’ if you don’t have this much but I’ll explain where that ‘gem’ comes from under ‘Lenders Mortgage Insurance’ later on this page. However, if you do your sums on having a 10% deposit + associated costs then we will be close to getting you into your first dream home.
Yep I hear you! Associated costs are things like stamp duty (if payable), solicitors costs, bank application fees, some government charges, and a couple of bucks in the bank for yourself post settlement, all of which can add up to another couple of thousand dollars.
What comes first – the property or the finance approval?
It will come as no surprise that most people start looking at property before having their finances in order but the reality is you need your finances sorted first. I get the fact that there is nothing remotely exciting about the actual Home Loan but if you haven’t had your borrowing capacity tested and Home Loan pre-approved by a lender, then you’re not ‘market ready’. There’s no point in looking at an area if you cant raise the money, is there?
Once you find a suitable property and reach an agreement on price things happen very quickly. So put yourself ahead of the game and have your finance sorted first and give yourself the best chance of securing the home of your dreams.
What if I don’t have 20% deposit?
Once you start to enter this ‘dark world’ of home ownership and home loans then every second person will ‘advise’ you to make sure you have 20% deposit. You cant do anything without 20% deposit they will tell you. Well I’m here to tell you it’s not a ‘deal breaker’.
This so called ‘avoid at all costs’ arrangement is called Lenders Mortgage Insurance and Ill explain what it is, how it works and how you can benefit from it.
Lenders Mortgage Insurance (LMI) is an Insurance premium that is generally applied when we have less than 20% deposit into a property purchase. The facts about Lenders Mortgage Insurance include;
- The premium is based on a sliding scale whereby the less deposit you have the risk to the lender increases and hence the premium increases.
- It’s a ‘one off’ commitment that is paid at settlement
- In most instances the cost of the premium can be added onto your Home Loan so you don’t have this ‘out of pocket’ expense when every dollar is counting
- Its purpose is to protect the lender in the event of the client defaulting
- The premium is paid by the applicant of the Home Loan
Who’s the genius that thought up this scheme (I hear you say)? Anyway whilst this all sounds pretty one sided in favour of the banks I’m a ‘half glass full’ person and if LMI didn’t exist banks would require us all to have 20% deposit as a minimum and so many good people wouldn’t be able to get into the market.
So if we have to, let’s use this ‘cost of doing business’ to our benefit and help us secure a great home or investment property sooner that will grow in value over the long term and help us achieve our personal and family aspirations.
How Much Can I Borrow?
The question of our Borrowing Capacity is right up there with the key information you need to know before looking to purchasing a property.
Put simply our borrowing capacity is established by a lender looking at our incomes and expenses, assets and liabilities – it is that simple.
To give you an insight into how lenders work and think, we need to understand that they are quite conservative by nature.
Typically when a lender assesses an application for finance, they will apply an ‘Assessment Rate’ which is typically a couple of percentage points above the actual lending rate on offer. This is simply because if they assessed all home loan applications at the rate on offer, and in 12 months time rates increase, then people that just passed the assessment test might be under financial stress – and no-one wants that.
In addition to this, other incomes such as Rental Incomes from investment properties, overtime or bonuses are invariably discounted downwards. So the effect is that if we qualify for a Home or Investment loan (with the lender) then barring major financial issues we should be in a good position to service the loan without any duress which is what everyone wants.
The ‘takeaway’ from this is – speak to us here at Vault Plus Mortgages early on in the piece to establish your borrowing capacity so you know what you can commit to and get it approved in writing.