June 16, 2016
While a large deposit is a great thing to have, it is not possible for everyone. So how much do you need? To answer this question, we first need to establish the costs of buying a property. For the sake of illustration, let’s assume that you wish to buy a small, established house in Melbourne for $400,000.
The additional costs of this purchase will include stamp duty ($8,185 if you are a first home buyer, $16,370 if you are not); legal fees (normally $1000 - $1500); land registry fees ($1123) and mortgage registration fees ($140), making a total of $10,948 for a first home buyer.
Most banks will lend either 90% of 95% of the value of the property. In this instance, let’s assume you wish to borrow 95%, which equals $380,000. Once a loan is greater than 80% of the value of the property, banks charge “Lender’s Mortgage Insurance” (LMI) on the loan. This is an insurance policy that protects the bank if the borrower defaults. The cost of the LMI is added to the loan. The cost of LMI rises as ratio of loan size to property value rises. In effect this means : the smaller your deposit, the more LMI you pay. So, in our example, the total of the loan plus the LMI must be less than 95% ($380,000). LMI might be $10,000 in this example.
So, here is the calculation of how much deposit is required in this example :-
Cost of property $400,000
Other buying costs $ 10,948
LMI $ 10,000
Total cost $420,948
Maximum loan $380,000
Deposit required $420,948 minus $380,000 = $40,948
Please note that this is just an illustration. Other factors will influence whether this fictional borrower could secure a loan for $380,000, including their income, financial commitments and credit history.
(Thanks to www.taxrebate.org.uk for their piggy bank picture)