First Home Buyers: Saving for a Deposit
Saving for a deposit?
Most lenders require a minimum deposit of 10-20% of the total loan amount. You’ll also need to cover the cost of Lenders’ Mortgage Insurance (LMI) if your loan amount is more than 80% of the value of the property. So ideally, you should start with a 20% deposit to avoid paying LMI.What is Lenders Mortgage Insurance (LMI)?
LMI is a one-off insurance payment charged by lenders to those borrowers who are considered a higher financial risk. Your risk is determined by your loan to value ratio (LVR) – the amount you wish to borrow, divided by the lender’s valuation of the property you want to buy.Lenders generally like a buffer of at least 20%, so that if you need to default on the loan, they stand a good chance of recouping the loan amount through the sale of your property.Although LMI can add several thousand dollars to property purchase costs, many borrowers consider it a worthy investment to help secure a loan with a lower deposit.But can your income support the higher loan repayments? We can give you an LMI estimate based on your financial situation before deciding how much you will need for your deposit.When should I start saving?
There is no time like the present! Unless you win the lottery or inherit a large sum, chances are you will need to make sacrifices in order to save; this may mean finding cheaper rent or cohabitating with friends or relatives, while making smart decisions around your disposable income.- Start with a budget: make an honest appraisal of all your living expenses and decide where you can cut back.
- Set up a direct deposit each pay once you know how much you can save: pay into a separate savings account with no card access to avoid unnecessary expenditure.
What are the extra costs?
As well as a deposit, you’ll also need to have enough money saved to pay for stamp duty and conveyancing, or legal fees associated with the purchase of the property.Families providing financial assistance
With property affordability getting increasingly tricky for some, many first home buyers are reaching out to their families to help increase their borrowing power.Partnering up can reduce the financial burden and may mean you can afford a better quality property with greater growth potential than if you bought solo; however, it’s not a move you should make lightly.Even if you decide to buy your first property with family, make sure you seek legal advice and ensure each party understands their financial and legal obligations. You don’t want a financial transaction or financial partnership to come between you.Discuss what would happen if someone were unable to cover their share of the mortgage and how you might reduce this risk. It’s also important to contemplate scenarios such as someone wanting to sell or move out sooner than planned.If this is something you’re considering, you may find it helpful to speak to a financial planner and lawyer. There are benefits to be gained, but as with every significant financial decision you make, it is critical to weigh up the risks at the same time.Rent out your first home
There’s no rule to say you have to live in the first property you purchase.Many first home buyers are challenging convention by rent-investing: renting where they want to live, and buying an investment property in a more affordable location. The objective for these renters is to buy where they can afford to get a foothold on the property ladder. As with any investment, the key is to choose a property on financial merit – not emotion.Are you looking for capital gain over time, or high rental yields right away? The investment property can be positively geared, where the rent exceeds the cost of the mortgage and upkeep to give you a profit – or negatively geared, where the rental income is less than the cost of owning and managing the property, which may create a tax deduction.It is important to seek appropriate legal and financial advice so you are well informed about how renting and taking on an investment property impacts your finances and tax obligations.The First Home Owners Grant and other incentives
The First Home Owners Grant and other various grants and stamp duty concessions may be available to give first home buyers a leg up.The grant usually applies to apartments and houses up to a certain value. These thresholds can vary depending on the type of dwelling and the state or territory in which the property is located. The savings can be significant, so it is certainly worth exploring.It is also worth checking if your state or territory offers stamp duty exemptions or concessions for first home buyers.Visit www.firsthome.gov.au to find out what’s on offer under the FHOG scheme in your market.For more information, contact our Lending Specialist on (02) 4732 3844.
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