Buying a new home is an exciting time, but it also can be a process full of confusion and lots of home loan jargon. Understanding your options around paying your deposit can help make your next move in the real estate market a confident one and ensure it’s at the right time for you. Here is important information about how much you really need for a home deposit in Australia.
1. Before you start- Evaluate your expenses and your income.
Before you get serious about a property, use an online mortgage loan calculator to see how large a deposit you can afford. Too many people overestimate how much they can save, and forget to factor in regular expenses.
Online calculators consider the loan term, interest rate, your income and all your expenses from other loans to credit card debt. Once you’ve calculated the deposit you can afford, you can decide which lender to approach to apply for a home loan.
2. Different lenders have different lending criteria.
If you’re looking to secure a mortgage outside one of the four big banks in Australia, the deposit you’re required to pay is determined by your lender. Some lenders may offer up to 95% mortgages for properties valued at less than $1,000,000.
3. If you pay less than a 20% deposit, you will need to pay Lenders Mortgage Insurance (LMI).
While you may be excited to learn not all deposits need to be at least 20% of the home’s value or greater, you do need to be aware smaller deposits come with an insurance caveat. LMI protects the lender, not the buyer, so they can be assured of regaining your new home’s value if you default on your loan. Almost every loan secured with a deposit of less than 20% will be charged LMI in Australia.
4. How much LMI do you need to pay for a 5% deposit?
Like any insurance type, different lenders negotiate different premiums for LMI. John Tindall, a financial specialist from Accumulus Home Loans in Sydney estimates, ‘If you’re looking at purchasing a $500,000 home with a 5% deposit, your Lenders Mortgage Insurance will likely be around $17,000. This amount significantly increases your costs, so you need to decide if this property is really the one for you’.
5. LMI can dictate your entrance into the property market.
The impact LMI plays on a first home buyer’s ability to enter the market at any given time divides some lenders. Some believe it’s best for a customer to buy a property with a small deposit and pay LMI as it allows them to get into the market before it continues to increase in value by another ten or 12%.
Conversely, other lenders believe if first home buyers aren’t able to save a 20% deposit, they should wait until they’re more financially secure as LMI shouldn’t be a fallback for good saving practices. This may be sound advice for those who struggle to save, as the stamp duty, title transfer and conveyancing costs involved in buying a house all create additional fees.
6. Stamp duty adds to the calculation of your deposit.
In Australia, first home buyers enjoy different stamp duty concessions on properties worth up to $600,000 thanks to the First Home Buyers scheme. For homes worth slightly more than the cutoff price, such as $750,000, stamp duties of around 5% are due. These costs are important to consider, as for this same home valued at $750,000, your stamp duty works out to be a whopping $37,500.
You can add your stamp duty expense to your home loan, but doing so increases the amount you need to borrow, and increases the deposit you need to pay upfront. Always ensure you factor in your stamp duty when calculating your deposit, or you will have miscalculated your deposit required and loan amount.
7. Zero deposit home loans don’t really exist anymore.
Most lenders require you to supply at least 5% of your new home’s amount unless you have a guarantor. Asking a parent or guardian to act as a guarantor is a serious agreement as they will need to pay your mortgage if you default on your loan. Plus, your repayments will be higher if you didn’t pay a deposit, which may put them in a difficult financial position.
Now you know the exciting news that not all home loans require a 20% deposit. However, before you jump at the chance to pay the smallest deposit available, weigh up whether paying LMI on top of your deposit is worth it and realistic for your next home purchase.