If you have plans to own your own home or investment property, the great news is that it’s never too early to take action. And the first important step? Saving sufficient money for the deposit you will need to be approved for your very first mortgage.
How much do you need for a deposit on your first property?
The basic equation to work by is that, whether your first property purchase will be an apartment, townhouse or house, you will, generally, require 20 per cent of the property’s value as your deposit before you lock in a mortgage with a mortgage broker or home lending institution. Don’t forget that, in addition, you also need to have some surplus savings up your sleeve to cover other fees and charges related to buying your first home and moving in.
Some lenders only demand a 5 per cent deposit but, although that might seem like something positive, you do need to weigh up the potential pitfalls around that – whether you are prepared to pay lenders mortgage insurance LMI), or if you will be approved for a bigger loan amount are two important questions to ask yourself.
Yes, saving for a bigger deposit will take more time and smart budgeting but having a fantastic savings track record shows potential lenders that you are capable of saving and helps prove your capacity to service your mortgage – and that goes a long way to increase your chances of being successful in your home loan application.
Understanding loan to value ratio
The basics? The more cash you have access to as a deposit for your first property purchase, the lower your loan to value ratio (LVR) will be. It really is as simple as that.
Your LVR can be calculated by working out the amount of the loan required, divided by the appraised value of the property. For the purchase of a $600,000 property with a home loan of $450,000, for example, the LVR would amount to 75 per cent.
The lower your LVR is, the less chance you will have to fork out for LMI. Importantly, lowering your LVR also means you are more likely to enjoy a mortgage approval by your preferred lender.
What is LMI?
Lenders Mortgage Insurance (LMI) is designed to protect the lender if the borrower can’t manage to make the prescribed mortgage repayments and the lender is unable to recover the balance of the home loan. LMI is about protecting the lender – not you as the borrower. It also does not protect any guarantor you may have utilised to secure your first mortgage – something that is vital to understand if you are calling on family to help support your loan application.
There is a one-off LMI fee, if you do require it, and this is typically paid on settlement, or added to the loan repayment amount. Remember that, if you do add LMI to your mortgage, you will also be paying the associated interest on that amount.
There is help for first home-buyers
Government help is available for people buying their first home and if you are building a new home, or buying your first home, check your eligibility for the First Home Owner Grant (FHOG).
Depending on your state or territory of residence, specifics of the grant may vary but, generally, access to the grant can help you pay for your home with a grant of up to $20,000 and also reduce how much you need to pay for stamp duty (land transfer duty).
For more detailed information in your location, visit the first home owner grant website.
Another government initiative to help first home-buyers save for a deposit is available via the First Home Super Saver Scheme (FHSSS). This initiative enables you to make up to $15,000 of voluntary contributions to your superannuation that can then be withdrawn to use for the purchase of your first home.
Be a committed saver
Substantial savings cannot be accrued overnight but, with patience and perseverance, they can be possible. Start with a realistic budget and commit to making consistent savings in a dedicated, high interest-yielding account. Every little bit really does count and, as the money grows in your savings account, you’ll most likely discover that the motivation to budget even more diligently grows too.
For more information about applying for your first home loan, talk to our residential mortgage brokers at Lending Specialists’ team today.