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How much deposit do I need?
There are a few factors to this question....
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In order to understand how much deposit you will need, you also
need to understand 3 main components.
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Loan to Value Ratio (LVR)
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Lenders Mortgage Insurance (LMI)
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Stamp duty
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Loan to Value Ratio or LVR
LVR is the amount borrowed divided by the property valuation.
For example, if your property is worth $500,000 and you borrow $450,000, you are borrowing 90% of the value of the property.
450 000 / 500,000 = 90%
This loan would be a 90% LVR
In this case, you would need a 10% deposit plus costs.
LMI or Lenders Mortgage Insurance.
As a general rule of thumb, if you have less than 20% deposit, you will have to pay Lender Mortgage Insurance. ​LMI is an insurance policy that covers the lender, not the borrower, in the instance that you can’t make your repayments and the property is sold at a loss. Most of the time, LMI is added to your loan, so you don’t have to pay upfront. The higher the LVR, the more the Lenders Mortgage Insurance costs. For example, if you have an LVR of 85%, your LMI would be less than someone borrowing 95%. ​The higher the loan amount, the higher the LMI is again. Another example if you borrow 85% of 300K your LMI would be less than someone borrowing 85% of 600K.
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​Most people don’t save up 20% and usually want to get into a property with around 5-10% deposit, In this case, the borrower wouldn’t pay the LMI upfront but simply add it onto the loan. ​LMI is not always the enemy though. Firstly it allows you to get into a home sooner and start paying off your mortgage instead of renting. Secondly, if you are an investor, it allows you to purchase additional properties with a reduced deposit, getting you into the investor market sooner, accumulating more property, and staring your journey towards wealth creation.
Most states have a government intuitive for lower-income earners to get into a property with as little as a 2% deposit. These loans are exempt from LMI, however, it comes as a price by way of a higher interest rate. Generally 1 ½ - 2 percent above the market rate.
Stamp duty.
This is the government tax you pay when you buy a house. You must pay this tax every time you buy a house. If you are a First Home Buyer, you may be eligible for Stamp Duty exemption or concession, which can save you thousands of dollars. If you are not eligible for Stamp exemptions, this is another substantial cost you will need to factor into your calculations. Please click on the link for more information on stamp duty - LINK
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Examples.
Let's look at a few different scenarios on a purchase price of $400,000 assuming there is no Stamp duty as it is a First Home Buyer.
I have 2% deposit.
2% x $400,000 = $8,000
You have very few options with a 2% deposit. In fact there is only 1 or 2 lenders that offer 98% LVR and your interest rate will be quite high. Much higher than current market rates. You may avoid paying LMI altogether, or you might be charged a risk fee instead. Sometimes getting out of these loans can be quite difficult as you need to pay down your loan in order to get out of the higher rate bracket.
I have a 5% deposit.
5% x $400,000 = $20,000
Great! You are eligible for a 95% Lend, which opens up a lot more options. Some lenders will let you capitalise the LMI on top of this so long as the combined loan and LMI does not exceed 98% LVR. You may still have to pay a higher interest rate until you can bring your loan down below 90%.
I have a 10% deposit.
10% of $400,000 = $40,000
Even better, at 90% LVR you can pretty much use most lenders. Your rate is most likely to be at market price or just above and you could capitalise the LMI if you wanted to.
I have a 20% deposit
20% of $400,000 = $80,000
You can use any lender you like, so long as you fit within their guidelines. At this LVR you will probably get a very competitive interest rate and you will not have to pay Lenders Mortgage Insurance at all.
As you can see there are many factors to consider. This is really just the basics as there are many more considerations in choosing the right lender that may include the postcode you are buying in, the type and size of the property, the ages of the borrowers, the type of employment of the borrowers and the savings history. Using a broker who has experience in these loans will save you a lot of time and also a lot of money. It’s important to find an expert to help you navigate such a huge decision.
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