September 13, 2016 by Grace Cumbers
The deposit you save to purchase a property is viewed as your direct contribution to the purchase price. The size of your deposit is one of the biggest determining factors when lenders are considering how much you can borrow.
Q: So why does the size of the deposit matter so much?
A: It gives the lender an idea of what you can afford to repay regularly.
Regular savings deposits, rental payments and investments across a period of several months gives a lender an indication of your ability to maintain the repayments on your home loan. Lenders look at these as well as your income sources (salary, investments, dividends) and assess how much money they are willing to lend you. Our borrowing power calculator can give you a rough estimate of how much you may be able to borrow.
A: it impacts how much lenders may offer you
The size of your deposit when you apply for your home loan can impact the interest rate of your loan. You may have a larger choice of lenders and more negotiating power with if you have a bigger deposit. A sizable deposit may even be able to secure a discounted interest rate from a lender.
A: it determines whether you’re a ‘risky’ customer or not, and impacts if you’re required to pay Lenders Mortgage Insurance (LMI)
Loan to Value Ratio (LVR) is the calculation that lenders use to assess the risk involved in offering you finance for your home loan. The LVR looks at the amount you wish to borrow related to the value of the property you wish to purchase. The higher the ratio, the more risk there is for the lender. Generally, if the LVR is over 80% you are required to pay a Lenders Mortgage Insurance premium to cover the lender from any losses that may occur in the event you had to default on your loan. An alternative to paying LMI is having a family member act as a security guarantor on your loan.
A: less interest will be paid across the life of your loan
If you have a sizeable deposit for your home loan, you stand to save a lot of money in the interest of the repayments. It’s simple; the less money you borrow, the less interest you will be charged as you pay off your loan in the future.
Q: So when is a good time to a mortgage broker?
A: now!
Our team is happy to help you evaluate your options no matter what your deposit situation may be. Our brokers can help you enter the property market, whether you’ve been saving for years, or haven’t put any money aside as savings. Some lenders will allow you to buy property with very little genuine savings in the instance of a family member acting as a security guarantor. We are happy to help you apply for a home loan, or set out a savings plan to get you in a position so you enter the property market sooner.
Q: What counts as savings towards your home loan deposit?
A: genuine savings:
Evidence of savings paid into an account for a minimum of three months. This shows the lender you are capable of making regular payments, and shows you can maintain regular repayments on a home loan. While some lenders may offer loans of up to 97% of the property value, most will require evidence of genuine savings to the value of at least 5% of the property’s value.
A: Shares, investments, equity in other properties
Genuine savings isn’t only recognised as regular deposits. Lenders also consider the following as proof of genuine savings:
- Shares, term deposits, inheritance or a gift of money held in an account for at least 3 months
- Equity in an existing property
A: Gifts of money
In the current house price climate of rising prices, it’s becoming more common for family members and parents to help children get into the property market by giving them a gift of money. When a family member does gift the money, the lenders will require proof that it is in fact a gift, and isn’t expected to be repaid. Lenders will ask for a statutory declaration that the money comes from immediate family and is non repayable. It’s best to ask your broker for the exact requirements, because the level of detail required between lenders about a gift of money can vary.
Generally, most lenders require evidence of the money held in an account for at least 3 months before it can be considered as genuine savings. This doesn’t always apply for the gift of savings as not all lenders consider it ‘genuine savings’.
A: proof of consistently paid rent (as genuine savings)
- Some lenders will consider your rental repayment history as genuine saving proof. Lenders will review your rental ledger as proof under certain conditions such as:
- You are still renting when you apply for your home loan
- You have at least 12 months of rental ledgers within a single property
- You’re currently leasing through a registered real estate agent or property manager
Not all lenders will accept rental repayment history as ‘genuine savings’. Many may also require you to have other proof, in the form of a regular savings account or a gift of money. Your broker can assess your individual situation and work with you to identify lenders that offer the right loan for your needs.
First Home Owner Grant and your deposit
The First Home Owner Grant (FHOG) can be an incredible bonus when budgeting for the purchase of your first home. If you are eligible for it, it’s important you factor it into your calculations correctly. The FHOG can be counted as part of your contribution to the total value of your property, so it can be included when calculating your LVR. This means that you may be able to avoid paying LMI if your genuine savings and FHOG add up to at least 20% of the property’s value.
If you are looking to build a new home on a block of land, the grant won’t be paid until the construction phase of your property, so it can’t be factored into the purchase of land.
Speak to your broker who will work with you to assess your eligibility for the FHOG, as the criteria and regulations vary from state to state. They can help you correctly budget for all aspects of your home purchase, whether it be buy and build or simply buy.
Contact us now for support securing your home loan! (02) 9358 4855
