How long is a piece of string? (Sorry, that’s not very helpful.)
The answer to ‘How much do you need to save?’ depends on a few things. Namely, the type of property you want to buy and how much you can borrow based on your current income.
The more expensive the property, generally the more cash you will need to contribute. However, it also depends on your situation and which of the following best describes your circumstances.
Option 1 – You don’t want to pay Lenders Mortgage Insurance and you don’t want to involve anyone else in the purchase.
As a very rough guide, if you want to avoid paying Lenders Mortgage Insurance (or involve family by way of a family guarantee) you’ll need to save at least 20% of the purchase price.
Option 2 – Family assistance (by way of a cash ‘gift’ or security guarantee) is available
If family members are able and willing to provide a cash gift, the size of the deposit required will be reduced.
Likewise, if you apply for a security guarantee loan you won’t need to contribute as much cash. There is generally a requirement to save at least 5% of the purchase price, but depending on the size of the security guarantee 5% might be all you need.
Option 3 – Pay Lenders Mortgage Insurance
Whilst the ideal situation is to save a deposit of at least 20% of the purchase price, it’s not always achievable. This is especially the case in a rising market where the ‘20% target’ rises faster than the speed at which you can save it.
Lenders Mortgage Insurance is a fee charged by the lenders when you borrow more than 80% of the value of the property. The premium varies with the Loan to Value Ratio (LVR) and the loan amount. The higher the LVR, the higher the premium. The higher the loan amount, the higher the premium.
Whilst it’s something home buyers like to avoid, it can help you get into the market sooner.
If you’re thinking about paying lenders mortgage insurance, here are a few things to consider:
- Are you purchasing a rental property, or a home to live-in? If it’s an investment purchase, taxation benefits may help to offset the cost of Lenders Mortgage Insurance.
- How are you expecting the property market to perform over the short term?
- How long will it take you to save 20% deposit?
- If you wait to save your deposit and property prices rise, would you be better off paying mortgage insurance now to get into the market at today’s prices?
- When applying for a loan with Lender Mortgage Insurance, whilst it’s not an issue it’s good to be aware that the application may be assessed with more scrutiny. For example, the lender may ask for additional documentation or take slightly longer to assess it.
If you want to know more about your borrowing options as a first home buyer, download a copy of our Free Home Buyers Ebook here.
