December 9, 2010
First home buyers entering the property market are being warned of advertisements for home loans with high loan-to-value ratios (LVR) because they may not be as enticing as they sound. According to RateCity more than half (51 percent) of home loans currently monitored on its website offer 95 percent loan-to-value ratios (LVR).
While this type of loan may seem attractive because a smaller deposit is required, there are additional upfront costs involved in buying a home that you need to factor into your savings plan.
Need to save for more
When applying for a home loan most lenders set a maximum LVR which is how much you can borrow in relation to the price of the property. For an LVR of 95 percent, the lender may give you up to 95 percent and you must fund the 5 percent. For instance for property worth $300,000, you need to outlay a $15,000 deposit to borrow $285,000.
But there are other costs that you need to save for on top of your deposit. Expenses such as stamp duty, lenders mortgage insurance, inspections and establishment fees are just some of the additional funds you will need to outlay before purchasing a home. And some of these fees are more expensive if you have a smaller deposit.
For a first home buyer, RateCity estimated these costs can equate to $15,000 and around $20,000 for other buyers. Therefore first home buyers purchasing property valued at $300,000 with a higher LVR loan need to save at least $30,000.
How to save more
But the good news is that you may be able to reduce some of these additional costs, which means you won’t have to save as much if you follow some of these steps:
- Lower your property purchase budget. Some states across Australia offer exemptions or discounts on stamp duty depending on how much you want to borrow. For instance in NSW you may receive an exemption of stamp duty of up to $17,990 for homes valued up to $500,000, and a percentage off homes valued between $500,000 and $600,000.
- First home buyers grant. First home buyers may be eligible to receive a grant depending on where you live. For instance in NSW you may receive $7000 to put towards these extra costs.
- Setup a savings account. To help your money grow faster setup a savings account with an automatic savings plan, so your funds are automatically deposited into the account regularly.
If you are a in the market for your first home be aware there are other costs you need save for in order to buy the house of your dreams. Compare home loans online to find one offering a lower interest rate and lower fees.