What is the Ideal deposit?
As a first home buyer you may think to yourself, what deposit do I need to get my foot in the door to buy my first owner occupied home?
What do banks and lenders want to see as a deposit? ideally all lenders would like to see 20% of the purchase price as a deposit, plus additional stamp duty cost if your purchase price is above the threshold for 100% stamp duty waiver.
Example, if I wanted to purchase a property in Sydney for $800k, how much do I need?
- Property Value $800,000.00
- 20% deposit $160,000.00
- Stamp Duty $31,777.00
- Deposit Needed $191,777.00
let’s just make it $195k after solicitor cost, then the bank will give you the other 80% of the purchase price in a form of a loan.
As a first home buyer in Sydney, most likely between 25-35 years old, how many people would have $195k sitting in their bank account? I think the majority would be able to answer that yourselves.
What happens if I don’t have that sort of deposit? That’s when Lenders Mortgage Insurance and/or the use of Government Schemes comes in to support your goals.
What is Lenders Mortgage Insurance?
Its an insurance to protect the banks from any losses incurred if you as the property owner is unable to repay the money borrowed (Loan). This once off, non-transferrable and non-refundable expense applies when a home buyer needs to borrow more then 80% of the valuation/purchase price of the property.
This expense/premium is added on top of the loan amount. Example, my base loan is 85% of the purchase price which is $450,000, my lenders mortgage insurance cost is $5000, my end loan will now be $455,000.
So how is Lenders Mortgage Insurance Calculated?
Different lenders use different insurers, more notably Genworth and QBE are used, however some banks may have their own inhouse insurance companies which could be cheaper. The location (postcode) and type of security (Apartment) may also play a role if you need mortgage insurance or not.
Every percentage above 80% is calculated differently, please calculate for yourself with the below link
Do I need to account for Stamp Duty as part of my deposit?
If you’re a first home buyer and purchase price is below the threshold to obtain 100% stamp duty waiver then no you do not need to save up that portion. However, if your purchase price goes above the threshold and/or if you’re not eligible for stamp duty waiver/concession then you will need to account for this expense.
Please use the below link to find out your eligibility as concessions varies from state to state.
What is the minimum deposit I need?
At a minimum banks require 5% genuine savings from a home buyer before they are eligible to apply for a loan, more notably as of recent the First Home Loan Deposit Scheme ( FHLDS – which we explain a little more) has been used with minimal deposit with the assumption that the property purchase price fall under the threshold and is stamp duty is 100% waived.
E.g If you’re purchasing a property in NSW for $600k, $30k equates to 5% deposit, the lender will provide you with the remainder of 95% with a 15% Government guarantee. Also Stamp duty is not payable as it falls below the cap, in addition no LMI is payable due to the 15% deposit guarantee.
What is genuine savings?
Genuine savings is generally a requirement by majority of lenders when a home buyer is borrowing above 90% of the purchase price of the property. Genuine savings is a form of savings held within your account/s for 3 months totalling 5% of the purchase price. This is to provide lenders and mortgage insurers confirmation of buyers saving capability.
Other forms of Genuine Savings
- Rental Ledger
- If you’ve been renting for a minimum of 6 months continuously with good conduct history and able to consolidate 5% of funds from family members or sale of assets, you are not required to show 3 months of savings history.
- Term deposit – 3 months in a term deposit account or can show overlapping from savings account to term deposit.
Please note that different banks have different requirements for “Genuine Savings”
What is the maximum percentage a bank will lend and how much deposit do I need?
Majority of lenders will lend up to 95% of the purchase price including Lenders Mortgage Insurance for owner occupied properties, some will lend more than 95% on a case by case basis, however for simplicity let’s just use 95% as an example. (if you’re not using FHLDS)
What does this mean?
Joe & Jo is looking to purchase an owner-occupied property for $650,000, as this is their first property, they don’t have to pay any stamp duty (NSW), They would like to borrow maximum 95% including Mortgage insurance as they have minimal cash reserves.
As a loan, the bank will lend $617,500 (95%) against that security costing $650k. As the loan is above 80% of the purchase price, lenders mortgage insurance is required. Referring to the table, LMI is 4.67% of the purchase price being $30,355.
To workout how much deposit is needed
- Purchase Price $650,000.00
- LMI $30,355.00
- Total cost $680,355.00
- Maximum Loan (95%) $617,500.00
- Deposit needed $62,855.00
If Joe and Jo are not using/eligible FHLDS they need a minimum of $62,855 to purchase a property worth $650k.
How can I abolish paying Lenders Mortgage Insurance?
Equity from another property
You can use equity from your existing property/ies as a deposit for another property.
If you have built up a substantial amount of equity from your property from either paying it down or the value of the property increased substantially over time, lenders will allow you to draw that equity out to use.
Following is how to calculate your usable equity
- Property Value $1,000,000.00
- 80% of the value $800,000.00
- Current loan $500,000.00
- Usable equity $300,000.00
This means you’re able to draw out $300k as a deposit + Stamp Duty cost for the contribution of your next property.
A non-refundable gift from parents (e.g.) can eliminate the need to pay mortgage insurance. Essentially your parents can provide you with the funds for the 20% + stamp duty cost (if needed) as a “GIFT” then you’re able to get a loan for the remainder of the 80% of the purchase price through a home loan.
This is most commonly used if your parents have built up substantial amount of equity on their property.
So how does a Guarantor actually work?
It is essentially using your parent’s equity on their property to cover the 20% deposit + stamp duty for your new purchase, therefore you are borrowing 100% of the purchase price + 5% (estimate) for stamp duty.
Banks will only allow the use of up to 70% of the value of your parent’s property, thus it’s important to understand what the usable equity portion is.
- Parents Property Value $1,000,000.00
- 70% of the value $700,000.00
- Current loan $500,000.00
- Usable equity $200,000.00
The usable equity portion on your parents property is $200k, therefore if you wanted to purchase a property and you have no savings at all, to eliminate the need to pay LMI you can use $200k of your parents equity as the 20% deposit + stamp duty cost if needed.
The risk involved is your parent’s security will be tied up against your property. Therefore, its advisable for your parents to obtain proper financial advice in relations to this structure as they carry the risk in the event you default on your home loan.
Certain professionals are able to borrow 90% of the purchase price with Lenders Mortgage Insurance waived, this means as long as they have 10% savings + stamp duty cost, the banks are willing to lend them the other 90% without the additional expense of LMI.
Different banks have certain criteria’s of professionals for this benefit.
85% loan with no LMI – no guarantor needed.
If you’re just shy of 20% deposit you may be eligible to borrow 85% of the purchase price without the need to pay LMI. Loan size, postcode, security and income criteria has to be meet.
With many schemes and grants the Federal Government has bought out to stimulate the economy and more importantly to help first home buyers get into the property market, it can get a little confusing, but more importantly what is the actual eligibility for it.
So let’s break it down a little
First Home Loan Deposit Scheme (FHLDS)
To help first home buyers and to abolish the need to pay lenders mortgage insurance with minimal deposit, the Australian government has guaranteed home buyers up to 15% deposit as long as home buyers have 5% genuine savings to contribute themselves. This is governed through National Housing Finance and Investment Corporation (NHFIC).
Currently there are 27 banks participating in this scheme with the first 10,000 spots all taken. The next 10,000 will be available in the next financial year on 01/07/2020
Please refer to below link for eligibility
First Home Super Saver (FHSS)
Bought out during the 2017-2018 federal budget as a way to ease the pain for first home buyers and allowing home buyers to contribute extra into their superannuation, as this reduced the amount of tax payable, hence allowing home buyers to save faster.
You can apply to have a maximum of $15,000 of your voluntary contributions from any one financial year included in your eligible contributions to be released under the FHSS scheme, up to a total of $30,000 contributions across all years.
$25k Homebuilders Scheme
Please refer to the Fact Sheet- very good case studies to read on.
First Home Owners Grant ( FHOG)
As state to state have different criteria please refer directly to the following