If you're saving for a deposit with the aim of avoiding Lenders Mortgage Insurance (or LMI), you might be surprised to learn that 20% of the purchase price isn’t actually enough.
The reason? Well in a word, FEES, and lots of them.
Stamp duty, lenders establishment fees, settlement agent fees, mortgage registration fees and legal fees all need to be added into the equation to give you a real idea of how much you need as a deposit.
In fact you will need more than 20%.
Let me explain with an example. Let’s assume that you're looking to purchase a property for $500,000 and you wanted to save a 20% deposit to avoid LMI.
You’d be forgiven for thinking that a 20% deposit would be $100,000.
The reality is that you will actually need closer to $120,000 to avoid LMI.
This is because the fees and charges that are added onto the top of the purchase price of the property are not included in the 20% deposit estimate the bank gives you.
To fully understand how fees affect your deposit you need to know more about the loan to value ratio or LVR, which is one of the two key aspects a lender looks when they they are assessing your application.
In short the loan to value ratio or LVR is the amount you need to borrow, divided by the purchase price of the property.
Therefore lets say you have saved $100,000, want to buy a place worth $500,000 and there are about $20,000 in stamp duty and other fees.
The total purchase price including fees would be $520,000 minum your $100,000 deposit means you would need to borrow $420,000 from the lender.
You need to divide the total amount you need to borrow ($420,000), by the purchase price of the property ($500,000). The purchase price is the price you actually purchased the property for, not including fees.
This equals 0.84 or 84% as a percentage, therefore meaning you are borrowing 84% of what the property is worth.
To avoid LMI... your LVR needs to be 80% or less
That’s right, including all fees and duties your overall LVR needs to be under 80% to avoid LMI.
By now you might of realised this means that not only do you have to have 20% of the purchase price as the deposit, but you also have to have the additional money to cover the stamp duty and lender fees.
These all depend on the value of the property you are purchasing, and if you are a first time buyer you may be eligible for stamp duty concessions and first home owner grants from the government.
If you want to learn more on LMI, we have a short video here you can watch which explains things in a bit more detail.
Call us if you're not sure how much deposit you need
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