How Much Deposit Do I Need To Get A Home Loan?
You are starting to think about purchasing your first property. For most people, the hardest part of the process of getting ready to buy is to save up the initial deposit.”Hurt Money” or “Skin In The Game” is what the banks like to call it. Lenders use these affectionate terms because that is exactly what a deposit is. This is hard saved money that you put into the property that you are buying to make sure that you too have something to lose, should you not be responsible and pay the loan back. Now when I say irresponsible, I do not mean that everyone who looses there home does so because they were irresponsible. Many people will fall on hard times that have nothing to do with anything in their control. I mean a substantial deposit in the game will make anyone work very hard to make ends meet and keep everything afloat.
How much, then, is the right amount of deposit to have saved? The short answer is ideally anything above 20% of the properties purchase price, and then your government fee’s as well. In South Australia, where Castle Mortgages is based your government fees are roughly 5% of the purchase price. So ideally you would have saved over 25% of the properties purchase price. Lenders will talk about a mortgages LVR which stands for Loan To Value Ratio. If you had saved the 25% as discussed above, and the 5 % would go towards the government fee, component. You would be left with 80% of the purchase price of the home as an LVR. From a loan perspective, some of your most competitively priced products will fall in this space. So if you are hoping to save on interest rate, you need to have at least saved 25% of the purchase price.
The next band in terms of deposit I will discuss is the 80-90% one. In Australia for any loan that has an LVR of above 80 %, the client will have to pay Lenders Mortgage Insurance. LMI, as it is known in the industry, is a one-off insurance premium that you the client pay. This premium is normally added on top of your home loan. This insurance protects the bank, not the client. If you cannot make your home loan repayments, and the lender is forced to sell your home. LMI covers the lender for any shortfall that there may be between your home sale, and the amount owing on your loan. You are not off the hook once this has happened as the insurer can come after you for the shortfall. The lender’s mortgage insurance premium increases exponentially as your deposit moves away from 20% towards 10%. The LMI premium will also have a direct relationship to the size of the loan. In this deposit range, there are still competitive interest rates to be found, but they are fewer and farther between. As this is a more risky type of lend interest rates that lenders charge will be more. Lenders will also look a lot closer, at applicants with regard to credit scoring. Lender policy will also be less flexible and become more stringent.
Finally, the question that I get asked very often is, what is the minimum deposit that I could buy a home with. In South Australia, the answer would be 3% plus again your government fees and any associated loan costs, which means total savings of around 8 to 9%. However, in all the cases mentioned above, you would need to, obviously meet the loan criteria too. There are many lenders also competing in the 90-98% LVR range, meaning a deposit of between 5 and 12%. LMI here is enormous and interest rates very high, and the old saying of having your cake and eating it too comes to mind.
In an ideal world, you would want to save the 25% deposit very often though this world is far from ideal though. There are options out there to suit almost everybody. The next thing to do would probably be to have a chat with a mortgage broker in Adelaide and maybe run your scenario past them. We at Castle Mortgages love to help you with planning to get into your first home, and we also happen to be very good mortgage brokes Adelaide too, so get in touch with us today.
If you are new to the market, click here, for our information on the First Home Owners Grant , as well as getting ready for a loan.