A common question from clients when looking to enter the property market is, ‘How Much Deposit Do I Need?’
Note: there is a difference between ‘the deposit required to secure a purchase of a property’ vs ‘the deposit required to obtain a loan to purchase a property’. This article will focus on the deposit required to obtain a loan – more details on the difference can be found here.
Our usual response is the more the better, as the greater your deposit the more choice of lenders you have available. However, if you are really keen, it is possible to obtain a loan to include the stamp duty amount plus as little as 3% of the deposit, but this reduces the amount of lenders you will be able to choose from.
Even if you don’t have a deposit you can still obtain a loan, however, read our ‘No Deposit Loan Information’ sheet for more details – Click Here.
Want More Detail….
When a Lender assesses a loan application they look at a number of different aspects of the deal. One of the key aspects is the ‘Loan to Value Ratio’ (LVR). What is the size of the loan verses the value of the security/property?
As a general rule, Lenders like to see the LVR as low as possible because if the borrower was to default on the loan, the Lender is more likely to recover the debt through the sale of the property. As a result, the loan is assessed as less risk to the Lender and thus usually lowers the interest rate.
Generally, loans that are higher than 80% of the value of the property incur Lenders Mortgage Insurance (LMI). We won’t go into too much detail about LMI but this is where the Lender will take out an insurance policy on the deal and pass on the cost to the borrower of the policy (usually the cost of LMI is added to the final loan amount), see table below. LMI can get quite expensive and how much depends on the Lender and the insurance underwriter.
If you are willing to pay Lender Mortgage Insurance to secure that property (many people do), Lenders are willing to provide you a loan as high as 97% of the value of the property.
This is where it can get confusing. Naturally you may think if the Lender is prepared to lend 97% of the value of the property you only need a 3% deposit. The 97% does not include other purchasing expenses which can add up, such as Stamp Duty, Legal and Search Fees. Hopefully the table below helps illustrate this point.
|
Buyer 1 |
Buyer 2 |
Buyer 3 |
Buyer 4 |
Buyer 5 |
Buyer 6 |
|
| Purchase Price – A |
350,000 |
350,000 |
350,000 |
350,000 |
350,000 |
350,000 |
| Stamp Duty |
8,322 |
8,322 |
8,322 |
8,322 |
8,322 |
8,322 |
| Sample Other Cost |
3,000 |
3,000 |
3,000 |
3,000 |
3,000 |
3,000 |
| Total Funds Required |
361,322 |
361,322 |
361,322 |
361,322 |
361,322 |
361,322 |
| Round Up |
365,000 |
365,000 |
365,000 |
365,000 |
365,000 |
365,000 |
| Deposit Amount – B |
20,000 |
30,000 |
40,000 |
60,000 |
80,000 |
100,000 |
| Total Loan Required – C |
345,000 |
335,000 |
325,000 |
305,000 |
285,000 |
265,000 |
| Loan to Value Ratio (LVR) |
99% |
96% |
93% |
87% |
81% |
76% |
| Approximate Lenders Mortgage Insurance (LMI)* |
NA |
TBA |
10,800 |
4,300 |
1,500 |
NA |
| Total Funds Require to cover LMI – D |
NA |
NA |
335,800 |
309,300 |
286,500 |
265,000 |
| New Loan to Value Ratio (LVR) = D/A |
NA |
NA |
96% |
88% |
82% |
76% |
| Buyer 1: | Although you have done well to save, $20,000 is still short of falling under the 97%.This buyer is best to talk to us about No Deposit Loans – click here. |
| Buyer 2: | Almost there, worth having a closer look at the deal.With LVR at 96%, the Lenders Mortgage Insurance is likely to be an issue. |
| Buyer 3: | Under the 97% mark, hence we’ll be able to look at some options. |
| Buyer 4: | Note LMI reduces dramatically with the higher deposit and lower LVR. |
| Buyer 5: | We are very close to removing LMI. Worth considering saving that little bit more.Talk to us about a pre-valuation that might help. |
| Buyer 6: | We are now well under 80% avoiding LMI and will have plenty of lenders to choose from. |
Note: The table above is an estimate and for illustrative purposes only. Estimates are for Home Buyer with the First Home Buyers Concession and Lenders Mortgage Insurance for Commonwealth Bank as at 22nd January 2014.
To find out how much deposit you need and how much you can borrow, Contact Us TODAY on 8823 5400 to arrange a confidential consultation.