23 January 2015
How much deposit should I look to save?
With low deposit property loans available from some lenders, it’s unsurprising that many first timers, particularly those without equity from a property behind them, are looking to get onto the ladder as quickly as possible.
With Lenders Mortgage Insurance generally payable on LVRs (Loan to Value Ratio) higher than 80%, it’s worth considering how this affects you longer term.
Remember, it’s not just the deposit you need to stump up for – it’s all your other ongoing costs; building and pest inspection fees, stamp duty and conveyancing fees. Your deposit should be considered as separate from these costs.
You may also want to consider building in a “buffer” to your deposit, so that if the market does move, you aren’t left in a position where you have more debt than the property is valued at. Putting the bare minimum amount of funds into the home loan isn’t necessarily a good idea.
What to know about LMI
Lenders Mortgage Insurance, or LMI covers the lender, not the buyer, in case you default on your loan. Those with less than a 20% deposit are considered at higher risk of defaulting on the loan, and therefore are generally required to pay LMI.
Usually, LMI is a one off payment by purchasers borrowing more than 80% of the purchase price of a property.
For those with pre-existing equity
If you are a home owner purchasing your first investment property, you may find that your home has increased enough in value to be able to refinance your home loan and use the funds to purchase your investment, while keeping your home. Discuss this option with your lender to see if this would suit your personal circumstances.
Essentially, you’re using your equity in your existing property to put a deposit onto your investment purchase. For those who have owned their home for a while in a growing market, while paying down the interest and the principal, it make sense that a substantial amount of equity may be available.
Some lenders require you to keep a buffer of around 20% of the equity in your home, so it’s unlikely you can use all of the equity in your property.
Using the equity may leave you cross-collateralising. Essentially, this is where the lender has a title over your home and the investment property, and depending on the equity you have in your own home you may not have to put a physical cent down anywhere. If you default on your investment property, you do run the risk of losing your home in this situation.
Lenders also have the capacity to begin dictating terms that you are not comfortable with if your situation changes.
One benefit of cross-collateralisation is that you will not necessarily have to pay LMI.
The other option is to get separate loans for each property using your equity. This fully separates your properties, may require no physical money be paid and allows you to only access the equity you need to cover the deposit and costs as a top-up loan or line of credit.
What you end up with in terms of deposits is a range of scenarios, each suited to different buyers. If you are unlikely to save anymore, then buy with what you can afford, however if you can quickly save more funds then it makes sense to go in with as much capital as possible.
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