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Blog   »   November 2014   »   How Much Deposit Do I Need To Buy A Home?

How Much Deposit Do I Need To Buy A Home?

This is a common question, but has many different answers depending on your particular circumstances.

The general answer is that most lenders require a minimum of 5% of the purchase price as a deposit, but there are also additional costs associated with buying a property that you need to consider.

When borrowing over 80% of the purchase price the lender will require you to pay Lender’s Mortgage Insurance. Lender’s Mortgage Insurance protects the lender in the unfortunate event of you defaulting on your home loan. Although the lender has the house as security, if property values decline then the sale price they get for the property may not cover the outstanding loan balance. Lender’s Mortgage Insurance protects the lender from any shortfall and gives them the comfort to lend much higher loan amounts of up to 95% (or even 97% in some circumstances) of the purchase price.

Another cost you need to consider is Stamp Duty. This is a government fee which is charged on the sale or transfer of land. It varies from state to state and is calculated on the purchase price of the property.

For example, if you are looking to purchase an established home in NSW for $400,000 and would like to borrow up to 95%, the following charges would apply:

5% Deposit = $20,000
Lenders Mortgage Insurance Premium = $14,288 (estimate only)
Stamp Duty = $13,490
TOTAL: $47,778

Note: There would be some other minor fees and charges applicable (including Transfer Fees and your Solicitors/Conveyancers Costs etc), but the above are the main costs associated with the purchase.

As you can see from the above example, the additional charges can be quite substantial.

How to minimise or avoid these fees

Stamp Duty is calculated on the purchase price of the property, so the lower the purchase price the lower the stamp duty.

The Lender’s Mortgage Insurance premium decreases the closer to 80% of the purchase price you borrow. In the example above the premium was around $14,000 when borrowing 95% of the purchase price, however if borrowing say 90% of the purchase price the premium would reduce to around $7,000, or borrowing 85% of the purchase price the premium would reduce further to around $4,000.

The best way to avoid paying Lender’s Mortgage Insurance altogether is to keep the loan amount at less than or equal to 80% of the purchase price. This can be done by:

  1. Saving up a larger deposit or looking at slightly less expensive properties
  2. Drawing funds from or using equity from another property you currently own
  3. Having a family member provide a security guarantee and using equity from their property

Some lenders even offer lower interest rates when borrowing less than 80% of the purchase price, so not only will you save on Lender’s Mortgage Insurance but you also save on interest.

By using a finance broker such as Hunter Business Finance, we can help you navigate your way through the sometimes complicated application process and advise you of ways to reduce or eliminate any fees such mortgage insurance. We also help you find the most suitable product from a variety of lenders to ensure you are obtaining a very competitive interest rate with the loan features you desire.

Whether you apply directly with the bank or use Hunter Business Finance, the loan products and interest rates are exactly the same. Let us use our expertise and get you the right product from the right lender for no additional cost. It could save you thousands...

For further information about deposit amounts and / or mortgage insurance contact us at Hunter Business Finance on 1300 137 656.

Posted: 14/11/2014 4:54:38 PM by Hunter Business Finance | with 2 comments

Comments

Thank you for your positive feedback, it is greatly appreciated. We will look into no deposit home loan options for our next blog, thanks for the suggestion.
Hunter Business Finance , 22/09/2017 11:47:37 AM
Nice example here.
We also have no deposit home loan options, you have any post related to that?

Thanks for sharing this.
Declan, 21/09/2017 10:43:37 PM



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