What do I need to know about home loan deposits?

August 21, 2017
Shae Aiello

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You’ve made your decision – you want to stop renting and get on the property ladder. So the first step is saving for a deposit!

Your home deposit is viewed as ‘your contribution’ to the purchase price of the property you wish to buy. It is one of the biggest factors in determining the kind of loan you may be eligible for and the amount you can borrow to buy your home.

A few things can count towards your home loan deposit, including genuine savings, investments, shares, equity in other properties, gifts of money and proof of consistently paid rent.

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You’ll need to aim for a minimum of 5% but the greater your deposit, the more you will save. The reasons why the size of your home loan deposit matters are:

  • It gives the lender an idea of what you can afford to repay regularly - regular savings deposited into an account over a period of several months, regular rental payments and investments all work together to give lenders an indication of your ability to maintain your home loan repayments.
  • It impacts the interest rate lenders may offer - the bigger your deposit, the more negotiating power and choice of lenders you may have. 
  • It affects how ‘risky’ you are as a customer, and whether you need to pay Lenders Mortgage Insurance (LMI) - lenders use a simple Loan to Value Ratio (LVR) calculation to assess how risky they consider offering you the home loan may be. The loan to value ratio looks at the amount you wish to borrow in relation to the value of the property you’re looking to purchase. The higher this ratio, the more risk for the lender. 
  • You pay less interest over the life of your loan - the less money you borrow, the less you have to pay off in the future. This means over the course of the home loan, you’ll also be paying less interest.

Our local home loan expert, Russell Crook, has a few tips on how to save for your deposit:

  • Make a budget - write down everything you spend over a couple of months. Be honest about your expenditure and what things cost. Always overestimate rather than underestimate so you don't get caught short.
  • Keep your savings separate and set up a separate high interest deposit account, as it greatly decreases the temptation to dip into it for an impulse buy. 
  • Set up an automatic payment to go directly into your savings account - this will ensure your money is saved before you’re tempted to spend it.
  • Minimize unnecessary spending - the small things really add up. Try cooking at home more often instead of eating out, invest in a coffee machine instead of buying one every day, try catching public transport instead of paying for parking, take a shopping list when you go grocery shopping, etc. You can only save money if you spend less than you earn!
  • Add any windfalls - add your tax refund, work-related bonuses or financial gifts to your savings pool.
  • Reduce debts - lenders will want to know about your other debts (e.g. car loan) as well as your credit card limits, not just the outstanding balance. Paying off other debts or reducing your card limit can improve your chances of loan approval, plus the money you would normally be putting into repayments can then be saved towards your deposit!

You may be surprised at how much you can save once you put your mind to it.

Why not have a look at our savings target calculator to see how much you could save?

Whether you’ve got no money put aside for your deposit, or you’ve been saving for years, Russell can help you evaluate your options. He can look at your circumstances and your goals and help you either apply for a home loan, or set out a savings plan that will get you on the right track and into the property market sooner. Give him a call on 9300 9322 today!

Posted in: First home buyers

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