How much deposit do I need to buy a home?
Several factors come into play when you’re deciding how much deposit you need to buy a home. What you can afford to repay regularly, how high your LVR is and what type of loan and the lender you apply with will all impact the desired size of your home loan deposit.
Working out your LVR
Your loan to value ratio will have the biggest impact on how much lenders are willing to lend to you. To work out how much you should be aiming to save, try working backwards and aim to save at least 5% of the property value. Use our loan to value ratio calculator to work out your ideal home loan deposit.
Whilst it’s not always essential to have a 5% home loan deposit, the more money you have to put forward as contribution to the home value, the larger the choice of lenders and loans available to you.
What can you afford to service (pay back)?
Working out what you can afford to repay on a weekly, fortnightly or monthly basis will also dictate the size of the loan you should get and therefore the necessary home loan deposit. But mortgage repayments aren’t the only costs you need to factor in. A mortgage broker will help you break down all the costs involved from the initial set up and moving costs through to council rates, strata fees and utility bills. All of these need to factor into your budgeting when figuring out what you can afford to borrow.
It’s also critical to think about the impact that changing interest rates will have on your repayments. Whilst interest rates are currently at all time lows, they won’t remain there for the life of a 25 year home loan. Your mortgage broker will help you to plan for contingencies and make sure that you will still be able to meet your repayments should interest rates increase. Have a look at our compare home loan interest rates calculator to see the impact an increase in interest rates will have on your mortgage repayments.
Interest only loans or principal and interest loans?
When looking to borrow it’s important to compare all the different home loan types available.
If you’re looking to purchase an investment property, it’s worth looking into the option of an interest only loan. With an interest only loan, you repay only the interest that is calculated on the principal (the initial loan value). As a consequence, the repayments are lower than with a standard home loan (where you pay off both principal and interest).
Lower repayments may mean that you are able to borrow more money to purchase your home. However in these circumstances, lenders may require larger home loan deposits, or greater security against the loan such as a family member going security guarantor.
A mortgage broker will help work you through the pros and cons of each home loan type and help you find the one that’s most suitable to your needs.
Factoring in LMI
If you aren’t able to save a 20% home loan deposit and don’t have the option of a security guarantor, lenders will require you to pay for Lenders Mortgage Insurance (LMI). LMI covers only the lender against any losses that may result from you defaulting on your home loan.
LMI is generally calculated as a percentage of the home loan value. Depending on the lender you select, you may have the option to either pay the LMI premium at settlement of the loan, or to add the LMI premium amount to the total you will need to borrow.
It’s important to factor this in to your borrowing power as it may impact the total amount of money you are able to borrow and the value of the property you can afford to buy.
If you’re able to put down that 20% deposit, you can definitely save on the hefty premium involved in paying LMI. However, for many, saving that much money can take quite a long time, or for renters, be almost impossible. Your mortgage broker will work with you to explore all your options, whether it’s paying LMI or having a family member act as your security guarantor, to make sure you’re getting the right home loan for your circumstances.
Factoring in other home buying costs
When you meet with a broker, they’ll take into account the amount you need to borrow to purchase your home as well as all the associated costs, to come up with the total funds you require.
These associated costs can include:
- Stamp duty
- Application or establishment fee
- Settlement fees
- Legal fees
- Mortgage registration
- Property inspections (pest/building)
All of these costs will contribute to the total funds you require to purchase a property. When working out the amount you will need to borrow, the calculation is:
Total funds required (house price + costs) – Your contribution (deposit + grants) = the amount of money you will need to borrow.
It’s important to factor these costs into your plans when saving for your home loan deposit and to consider what your maximum property value will be when you are looking at houses.
Your mortgage broker will help give you a comprehensive breakdown of all the associated costs in purchasing a property to make sure you are borrowing within your means and borrowing enough to purchase your home.
Looking at your credit record
Your credit report holds your personal information (such as name, address, date of birth) as well as a comprehensive outline of your credit history from applications, payments and denials of credit.
The credit report draws information from banks, lenders, telecommunications companies and utility companies to assess your ability to repay debt and your risk as a debtor.
When you submit a home loan application, your lender will obtain a copy of your credit report from a credit report agency and may approve or deny your application based on its contents. The lender may also use your credit report as a factor in setting your home loan interest rate. However, even if you do have a less than perfect credit history, there are lenders on our panel that can help.
If you are looking to take out a home loan in the near future, it’s valuable to get an idea of what your credit report looks like. You can request a copy of your credit report through credit reporting agencies like Eaquifax. If you do have any blemishes such as late payments or declined credit applications, it’s worth speaking with a financial adviser on ways to improve your credit scores, or, have a read of our tips for improving your credit score.