Many first home buyers struggle with knowing how much money they should have as a deposit.
Fortunately, there are no hard and fast rules when it comes to home deposits.
What lenders want
Ideally, lenders would like you to have a 20% deposit. In other words, if you are looking to purchase a home worth $500,000, you should come to the table with savings in excess of $100,000.
The money you have saved will not only fund your initial contribution to the purchase price of a property, but it will also be used to pay for stamp duty (where required), as well as any other fees and charges associated with buying a home.
What if you don’t have a 20% deposit? Don’t fret.
Many lenders will take a significantly lower deposit, with many happy to lend up to 90% or 95% of the value of your desired property - provided you meet their specific lending criteria.
Of course, if your deposit is less than 20% of the value of your home, you will be required to pay Lenders’ Mortgage Insurance or LMI.
What is LMI?
Lenders' Mortgage Insurance is, as the name suggests, insurance. However, unlike other insurances that protect you, LMI protects your lender in the event you default on your home loan. It’s usually a one-off payment made at the time of loan settlement.
The bigger your deposit, the less LMI you will have to pay.
Of course, having a deposit in excess of 20% isn’t the only way to avoid paying Lenders’ Mortgage Insurance.
If you have a parent or a sibling that is happy to use the equity in their home to guarantee your loan, you can also avoid paying LMI with their help.
Many lenders allow a family member to help you to buy your own home by providing additional security. The person providing this assistance is known as a guarantor. This is different to being a co-applicant or co-signer.
A co-applicant is included on the loan and will be responsible for the entire loan until it's repaid in full.
A guarantor, on the other hand, is linked to a loan by a guarantee. This guarantee can be released and the guarantor’s responsibility stopped without the loan being repaid in full. To use a guarantor, you must be able to service the entire loan on your income.
Regardless of whether you have someone to go guarantor on your loan or not, when it comes to buying a home, the first thing you should do is speak to your mortgage broker.
A local loan expert can help you navigate the home buying process and work out how much you may be able to borrow. They can also help you understand how much of a deposit you may need in order to get your foot on the property ladder and make your home buying dreams a reality.