November 25, 2015
Saving your home loan deposit is the critical first step when planning to purchase a home. However many people are confused regarding how much of a deposit they need in order to secure their loan.
The answer isn’t that simple as everyone’s personal goals and current situation is different….
Broadly speaking most financial institutions will accept 5% of the total purchase price as a deposit. So for example if you wished to purchase a $500k property, you will require at least $25 000 as a deposit in order to secure the loan. Remember though that there are also purchase costs associated with buying, including legal fees and stamp duty. So realistically, $50 000 would be the minimal required to buy the property.
There is more to consider though.
If you are borrowing 80% or more of your home’s value, you will generally also be asked to pay lender’s mortgage insurance. Lender’s mortgage insurance (or LMI) is a one off premium that you pay so that the bank is protected if you default on the loan. LMI can be paid upfront or as part of the loan.
LMI can be avoided if someone acts as a guarantor for your loan. Also, you may have family or friends who are willing to “gift funds” as part of your deposit. As long as you meet certain lending rules, these gifted funds can be used to purchase.
So how much deposit do you really need for your home loan?
The short answer is the more the better. Lenders feel much more comfortable lending you money when your deposit is 20% or more of the total purchase price or more.
Remember that in order to secure the loan you will also need to satisfy the lending institution’s necessary criteria which generally includes areas such as credit history, savings plan and employment history.
Herman Esterhuizen from Mortgage Choice recommends that you set a goal when saving for a home loan and stick to it. “It is good if you can add any extras into your savings to help them along eg your tax return or a bonus etc. Make sure you have your money in the best savings account aswell which can offer you the highest interest rate.”
Looking for a home loan now or in the future? Our team at Mortgage Choice are home loan experts offering advice for no cost to you. Give Herman a call to organise an appointment on 0432507101.