It is important to know how much you will need to save before looking to purchase a new home. By knowing how much you need to save you could potentially negotiate lower interest rates and avoid paying Lenders Mortgage Insurance.
Determine your borrowing capacity
A good starting point is to find out how much you can afford to borrow; this can be done by using calculators available on bank or mortgage broker websites. Knowing the size of the loan you can afford is important as this will help you to determine how much you can spend on a property.
Please use the Borrowing Capacity Calculator to determine how much you can afford in repayments.
Minimum deposit required
By borrowing more than 80% of the property value you will be required to pay Lenders Mortgage Insurance (LMI).
Most banks require you to have a minimum deposit of 5% of the purchase price. The bank will generally provide the rest up to 95%, although some banks will allow you to add the cost of the Lenders Mortgage Insurance which will therefore allow you to borrow up to 97% of the purchase price.
For a property being purchased for $400,000 this will require a minimum deposit of $20,000
Can you borrow for stamp duty?
No, the stamp duty will be required to paid from your cash deposit, therefore you will usually be required to save at least 10% of the property purchase price to cover the deposit and other purchase cost such as stamp duty, legal fees and building & Pest inspection.
As an example, if you are purchasing a property for $400,000 you will need to save 5% ($20,000) for the deposit and approximately $20,000 to cover the cost of stamp duty, legal fees, building & Pest inspection.
As discussed earlier some banks may add the Lenders Mortgage Insurance to the loan, however if they don’t you will be required to save these funds as well.
Lenders Mortgage Insurance (LMI)
LMI can usually be avoided if you have a deposit of 20% or more to put towards the purchase of the new property purchase.
LMI can be costly and potentially add thousands of dollars to your loan.
LMI is insurance that you have to pay the premium for, this will protect the lender if you are unable to repay the loan, it will not protect you if you default or can’t repay the loan.
As an example, if you would like to avoid paying LMI and are purchasing a property for $400,000, you will need to save $80,000 (20% of the purchase price) for the deposit. You will also need to save approximately $20,000 to cover the cost of stamp duty, legal fees and building & Pest inspection to name a few costs.
You can always see your bank or mortgage broker who can assist you with getting pre-approved for a loan. This is where the lender will provide you with a loan amount that is conditionally approved (usually up to three or six months), this will provide you with exactly how much you can afford to spend on a property.
During this time you will also be able to increase the amount of deposit you have saved and have the freedom to make an offer on the right home once you find it. You also won’t waste time looking at properties that are outside your price range.
The information above has not taken into account your personal circumstances. Before making any decision speak with an expert in lending whether it’s your bank, mortgage broker or Financial Planner before making any decision to take out a new loan, refinance or take on more debt.
For an obligation free chat, please give me a call on 1300 982 499. I’d be happy to help.