Shoestring savings to home ownership
As a rule of thumb, you’ll need at least a 10% of the purchase price of your future home as a deposit to qualify for a 95% Loan to Value Ratio loan.
This allows for the often overlooked upfront costs of Lenders Mortgage Insurance, a once-off payment which allows you to borrow more than 80%, and stamp duty, a state government tax on property purchases, to be capitalised on to the principal of your loan.
On a house price of $300,000, a minimum deposit to get by is $30,000.
There are two exceptions to this, firstly as QLD, NT and WA don’t have stamp duty, which reduces upfront costs.
Secondly, everywhere but QLD and NSW have first home buyer grants for established properties, which provide a handy deposit cash injection to the budding first home buyer.
If by adding your local first home buyer grant to your pool of savings you get over the 10% deposit threshold, then you should have enough deposit to get into home ownership.
Rural homes come with a catch. Lenders are often unwilling to lend anywhere close to 95% of the purchase price. Lenders seem to be more comfortable with a loan amount somewhere in the 60-80% region.
How can I get a home loan without the minimum deposit?
There are a small selection of guarantor loans on the market that enable first home buyers to borrow from 97 to 120% of the purchase price.
Some loans also allow upfront costs to be tacked on as well. These loans rely on a family member financially guaranteeing the loan, which involves committing a set amount of money as a guarantee against your default.
I asked Heidi Armstrong of State Custodians Mortgage Company about minimum saving requirements:
Can I just get my parents to stump up the entire deposit?
“From a lenders perspective, we want to see that you really understand what’s involved in getting a loan. You’re going to have to pay off this loan for a long time. So what we want to see is that you’ve made a commitment to the process yourself, and that commitment’s come from you creating your own pot of genuine savings.”
How much do I need to prove ‘genuine savings’?
“Genuine savings is something that pretty much all lenders want to see, and if they don’t see it, they’ll generally charge a higher interest rate.
“Genuine savings means that you’ve put away a minimum of 5% of the deposit amount over no less than three months. That money should come from regular deposits like salary. So we don’t want to see that your 5% savings are from lump sums like tax refunds or gifts.
“Certainly gifts are fantastic and tax refunds are fantastic, and all of that can contribute to enhancing your deposit. But, as a first home buyer, you need to show a lender you’re diligent in terms of putting away the pennies yourself for a period of time.”
Options abound for getting into first home ownership; you just need to figure out which road suits your individual requirements.
If you go to a lender informed, with a purposeful deposit technique in mind, and an understanding of how much you can borrow — home ownership can transform from dream to reality.
Article written by Jeremy Cabral (Source)