Do I need a deposit to buy a house?
If you are wondering ‘do I need a deposit to buy a house?’, here is a quick and simple summary of how you can get into a property sooner.
‘We all want to achieve the great Australian dream.’
After all, owning our own home is life-changing. It offers security and more often than not leads to being financially better off.
Interest rates are at an all-time low.
Plus buying a house is exciting. What’s not fun is saving for the deposit.
So is a 10 per cent deposit enough to buy a house?
Yes, and no. The new deposit normal is now 20 per cent to avoid paying LMI (Lender’s Mortgage Insurance) — a one-off insurance payment that protects your mortgage lender against your default. This means you’re likely to only need a 5-10 per cent deposit.
Given most institutions are restricting the loan to value ratio they’re willing to extend to borrowers, LMI is usually payable if your LVR — the amount you need to borrow as a percentage of the purchase price — is above 80 per cent.
High property prices mean that most of us will need to put down a deposit to get a loan approved, and the more money we have, the less likely we’ll need to take out LMI.
Therefore putting a borrowing strategy in place is crucial in deciding whether to invest extra time saving up a large deposit, or paying LMI and applying for a loan with a small deposit.
Larger deposit versus a lower deposit
A downside is a small deposit attracts a larger LMI premium. On the plus side, some loans offer additional features, including lower interest rates to reward borrowers with bigger deposits.
Do I need a deposit to buy a house – work out what you can afford
There are many ways to save for a home that don’t require major changes to your lifestyle. So it pays to know how big a deposit you can afford. Work out how much you can regularly put aside and how long it will take to reach your goal — then stick to it. The easiest way to see results is to cut back on extras. And that’s where doing a budget helps.
Another tip is to open a high-interest savings account. Once you know how much you can save, make your money work for you. Don’t leave it in your everyday transaction account. Or if you plan to buy your home in a few years’ time, consider investing your savings in shares or a managed fund. Remember to always seek professional advice before making any investments.
Rent and invest when you trying to save a deposit to buy a house
Another way to get your foot in the property door is to rent and invest.
Of course, you’ll need to be realistic. On a $400,000 property purchase you could access a 95 per cent loan of $380,000, with a cash deposit of $20,000. So you may need to consider a smaller home, or a property in a different area. Just remember you’ll also need some money to cover the costs too (i.e. the governments taxes, etc.).
Whether you plan to buy, or invest in a home, it is a huge step — and it’s easy to be daunted by the large sums of money involved. With careful budgeting, saving money towards your property dream is made much easier.
ASIC publish a great guide to buying a house.
If you’d like to chat about finance, please contact us.View more