Ok, I get that’s pretty obvious, but there’s more to saving for a deposit than just putting money away. It’s about setting realistic goals and sticking to a plan. It begins with having a basic understanding of how much exactly is coming in each week or fortnight or month, and how much is going out. Saving is about truly understanding your personal budget and making adjustments where needed to reach your target. Without a plan, you will get nowhere. Simply putting whatever is left at the end of the month away won’t cut it.
Lenders Mortgage Insurance (LMI)
When borrowing more than 80% of the value of a home, the bank will require you to pay Lenders Mortgage Insurance (LMI). The cost is a premium that the banks pay to insure the loan, so that if they ever have to sell the property and can’t recoup what you owe, a mortgage insurer will pay them the difference. It does nothing to protect the borrower, and for this reason many clients are loath to pay it. But what it can do is get you into your own home sooner. I’ve had many discussions with clients who don’t quite have a 20% deposit and would prefer to save an extra say $30,000 to avoid paying LMI. When you consider how long it may take to save the additional deposit it can be counter-productive. Let’s say a year ago you decided to wait 12 months to save the additional money. In that time Sydney house prices have grown 15 per cent. So the $15,000 or $20,000 you might have saved in mortgage insurance has cost you an extra $90,000 or $100,000 to purchase something.
With the median house price in Sydney around the $900,000 mark it’s little wonder more and more borrowers get into the market with some assistance from their parents. It can take a couple of forms, whether it be a lump sum that mum and dad provide as a gift to put towards the deposit, or by agreeing to be guarantor on the loan. Let’s say your parents have a home worth $1 million, and a mortgage of $200,000. You’ve found your dream property worth $700,000, but have little or no deposit. By signing on as guarantor, your parents are agreeing to allow you to unlock the equity in their house. Between the two properties, the bank will hold $1.7 million in security, versus total debt of $900,000 (around 50% loan to value ratio). The best part is, you’ve financed 100% of your purchase price, and paid no mortgage insurance. It’s a big question to put to your parents, but who knows, they might be happy to see you finally move out!
Tower Mortgage Broking are a professional Sydney based mortgage broker. For expert home loan advice on how you can get into your first home sooner, contact us today.