May 24, 2016
Quite simply it really depends on how quickly you can save! It makes no sense taking two years to save a further $20,000 if the type of property you are considering purchasing has gone up more than this amount over the same period. Generally speaking, it's most likely you would only consider saving extra funds to keep your borrowings under 80% of the property value and therefore avoid Lenders Mortgage Insurance (LMI).
Let's look at an example:
We will assume you are looking to purchase a property for $500,000 and you currently have savings of $100,000. However, you need a total of $120,000 to avoid LMI and you have calculated that it will take you 24 months to save this money. If we assume a growth rate of 5% pa, our $500,000 will be worth $551,250 after two years. Even taking a modest amount of LMI into account (say $10,000) you would still be worse of by approximately $21,000!
Generally speaking, most lenders are wanting to see evidence of 'genuine savings' whenever a borrower is looking to borrow more than 80% of the value of the property. The amount of genuine savings, along with the time it must be held varies from lender to lender. It is normally 3% or 5% of the purchase price held over either 3 or 6 months.
As touched on above, if you borrow more than 80% of the value of a property, you will be required to pay LMI. This is a one-off cost and is a 'risk fee' for the greater risk incurred by the lender where you cannot contribute 20% + costs of the property purchase. Having said that, lenders will waive the LMI fee for certain professionals, so it certainly makes sense to explore this option.
Should you wish to discuss the purchase of your new home or any other mortgage related matters please contact me on 02 8765 8700.