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. The question I am often asked is “do I need a deposit?”.
Interest rates are at an all-time low and tipped to drop further. Plus buying a house is exciting. What’s not fun is saving for the deposit.
So is a 10 per cent deposit enough? 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. If you’re prepared to pay the LMI, you’ll 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 means 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 apply 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.
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. If you leave it in your everyday transaction account, you might be tempted to use the cash. Or If you plan to buy your home in a few years’ time, consider investing your savings in shares or a managed fund.
Rent and invest
Another way to get your foot in the property door is to rent and invest. This option is touted as the Australian dream in reverse brought about by soaring property prices. This new property investment normal is backed up by data that shows by the end of this year more first-time buyers will be property investors rather than owner-occupiers.
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.
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. Allied Investment Group can advise how much you need to borrow and help you to put an investment plan in place. Call 1300 886 149 to get started on your home ownership journey.