Getting into your first home can sometimes be daunting and one of the most common questions I get asked is “How much deposit do I need?”
That’s such a great question, however the answer, it differs depending on the type of loan application, the lender you’re using and so on.
5% deposit
there are still some lenders (although not many) that will allow you to borrow 5% of the purchase price, this means the deposit you need is 5% of the purchase price plus any legal and government fees.
The Pros
This gets you into your first home sooner which means you can start paying off the loan and building equity in your home.
The Cons
This type of loan is considered riskier, because by the time your Lenders Mortgage Insurance is added to the loan your overall loan amount is around 98% of the value of the home. Given this higher risk, the banks and lenders usually increase the interest rate slightly. For example, one of the current lenders still offering this low deposit add 1.1% onto the home loan.
8-10% deposit
If you can get together a little more deposit, you will find you increase the lenders you can choose from. This means rather than choosing from three lenders you have a whole panel of lenders you can choose from potentially. This also means you can choose the lender or bank that offer the loan package that suits you best.
The pros
More variety means more choice, ultimately it means you are selecting the bank or lender you want to use for the next 30 years. This also means you can shop for the lender or bank who will offer you a great interest rate now and ongoing.
The cons
You will still have Lenders Mortgage insurance added to the loan. Any deposit less than 20% has a Lenders Mortgage Insurance charge added.
It can also be difficult to save the deposit, especially if you’re paying rent as well.
20% deposit
This option, where available is always going to be the best option. A 20% deposit means the bank is lending 80% of the value of the home which makes the banks and lenders much more comfortable.
The pros
80% loans at times, can get better discounts applied, because the risk is lower. There is also no Lenders Mortgage Insurance added to the loan which can save you thousands.
The Cons
20% of the purchase price can be difficult to save up. For example, if you’re looking for a home in QLD for $450k then your best deposit is $90k plus government fees, solicitor fees ect. (aprox $5k). Not a lot of people have access to $95k to put towards their first home.
$0 deposit
The final option, and another good one is Family Guarantee. This is where mum and dad might have a home that they use as security rather than having a ‘cash deposit’
The pros
This option means no Lenders Mortgage Insurance is charged which again, can save you thousands, and it also means you don’t need to save any money at all (although if you have saved some that’s even better)
The Cons
Your parents must be comfortable to go guarantor, whilst I structure the loan to try to limit the risk to the guarantor but there is always a risk.
The other issue may be, your parents want to help but they may not have a property (or enough equity) to help.
If you are thinking about getting into your First Home in 2019, make sure you check out The First Home Buyers Program, its free to complete and the online course will help you to work out, how much deposit you need as well as how you will budget to get that deposit together.
If you are after a chat about your personal circumstances and how I could help, send me your details and I can arrange an obligation free chat.