How Much Deposit Do You Need to Purchase a Home?

This guide provides first-time buyers with all the information regarding the deposit for the home amount and other miscellaneous costs one should be aware of before taking concrete steps to purchase their dream house.

How to Calculate your Price Range

The home buyer who wants to purchase a property should determine the allocated budget. They should then review the real estate properties that fall under the budget and compare the price ranges and property types that complement their housing needs. To better understand the property budget, one can employ various online affordability calculators that allow the user to compute the price ranges of the property against their budget. One can also utilize their repayment calculator to compare varying interest rates, types of repayments, and loan terms that impact the repayments.

Putting Down your Deposit for Home

After finalizing their budget and property, the home buyer must circle down on the deposit for the home amount they want to make. It is an important decision to make as a substantial deposit on the property would minimize the borrowing amount, directly affecting the interest rate and repayment amount. Many real estate experts advise home buyers to save a significant amount before the purchase to avail of handsome interest rates and reduce the cost of their repayments.

Generally, 20% of the deposit for the home to be obtained is regarded as an adequate down payment amount. One can also avail of a loan from the financial institution if their deposit amount is less than 20%. Still, they must take out a Lender Mortgage Insurance (LMI) that will increase the loan cost and elongate the repayment period.

A potential home buyer can employ the Loan to Value (LVR) to compute the home loan amount they want to borrow from the lending institution. LVR is the percentage of the loan amount against the property valuation of the bank. Let’s take an example for a better understanding.

Suppose you have taken out a loan of $800,000 to purchase a property valuing $1,000,000. In this case, the property loan-to-value ratio would be 80%. The lending institutions have set limitations on the loan-to-value ratio after accounting for variables such as property type, location, and the applicant's financial stability.

It is to be noted that the applicant is required to take a Lender Mortgage Insurance in case the bank is lending the LVR anything more than 80%.

Other Upfront Costs

The Home buyers must also look into other upfront costs they have to bear other than the cost of the property.

Stamp Duty Cost

This state and territory government tax is subject to various factors, such as:

• The location of the property
• Whether the property in question is a first home or an investment.
• The market value of the property

A stamp duty calculator can help the home buyer to assess the stamp duty amount from the comfort of their home. They must mention the values on the featured fields, and one can get the ballpark amount almost immediately.

Legal Cost

An individual purchasing a home must conclude various legal steps about buying a property. They have to bear the conveyancing cost regarding the sale and transfer of the real estate, which might include property and title search, exchange and review of the sale contract, title transfer, and other such aspects.

Registration Fees

The mortgage establishment and registration fee is a state fee that the state government levies. Home buyers are required to incur this tariff as the property obtained is the mortgage for a home loan. The home loan must be registered with the government so that future buyers have an account of the mortgage on the property.

Lenders Mortgage Insurance

As mentioned above, the home buyer must bear the Lender's Mortgage Insurance if the home's deposit is less than 20%. However, some lenders provide the facility that includes the LMI cost in the repayment of the loan itself, where the lender is not required to come up with any cost upfront.

Factors Affecting Mortgage Rates

The following factors have been identified as the significant determinants of mortgage rates on a home loan:

Loan-to-Value Ratio

Refers to the percentage of the property value the lending institutions are inclined to offer the borrower. If the property value ratio set by the lender is 80%, the borrower must come up with another 20% to get a loan approved. If the percentage of LVR exceeds 80%, the loan recipient is required to pay LMI on the loan.

Mortgage Amount

The mortgage amount on a loan also significantly impacts the mortgage rates. A larger mortgage increases the borrower's bargaining power to vouch for more significant discounts. The eligible borrower with an approval limit of $1,000,000 can avail of a twelve basis point more considerable discount than those with an approval limit of 400,000. It has been identified that lending institutions are more inclined to offer larger discounts.

Credit Score

The loan applicant's credit score reflects their creditworthiness, i.e. how punctual and regular they are with their repayments. Credit agencies create an individual's credit report based on their financial history. Making timely repayments regarding bills and past loans would showcase fiscal responsibility. Individuals defaulting on their previous repayments may negatively impact the applicant's credit score. The applicant should double-check their credit score online before applying for a loan.

Other Factors

• The mortgage rates on the home loan also vary based on the property's location.
• The rates may also vary concerning the property type. The recipients applying for loans on an already existing property would be offered higher discounts compared to construction loans.
• A self-employed individual who needs to maintain proper documentation ensuring their proof of income would be offered a higher interest rate.
• The mortgage rates on the investment loan are higher when compared to loans applied for self-occupied properties.

Support Available for First-Home Buyers

The government in Australia have designed various one-off payments for home buyers, assisting them towards their new home. The amount, criteria and details on the first homeowner grant vary based on state and territory. One can look over the Federal Government’s First Home Owner Grant website or check with their respective lender to access more information.

Home buyers can also conveniently maintain a detailed savings plan to meet their home repayments. Being punctual and diligent with credit payments will also improve the loan applicant's credit score and help them obtain attractive interest rates on their home loans.

Understanding your Borrowing Power

Various factors impact the borrowing power of the applicant, such as:

• Income
• Credit Score
• Expenses
• Lifestyle