The hardest aspect of buying a home is saving for the deposit. For many of us, that means scrimping and saving, possibly for years, to gather the magic number that will allow us to bid farewell to rented digs.
But how much should you save, and how does the size of your deposit affect your home loan repayments?
The days of no-deposit 100 percent home loans are over, but you can still secure a loan with a low deposit of 5 percent of the purchase price. Generally, however, the size of your deposit will depend on the loan and lender you select. If you are buying your own home – as an owner-occupier – you generally need to save a deposit worth 5 percent to 10 percent of the purchase price. As an investor, your deposit must cover 10 percent of the price, although you may find a lender that approves a smaller deposit.
However, there are other issues to consider when it comes to the size of the deposit. If your deposit is less than 20 percent of the purchase price, you may have to pay Lenders Mortgage Insurance (LMI). This is a one-off payment to your lender, designed to insure them in the event you are forced to default on the loan and the lender has to sell your home at a loss. If you want to avoid this extra cost, you should aim for a 20 percent deposit.
Possibly the best motivation to save as big a deposit as possible is the impact it will have on your home loan repayments. According to the RateCity mortgage calculator, if you buy a $500,000 home with a 5 percent deposit and a home loan with a variable interest rate of 7 percent, your monthly repayments may be $3,357. If you save a 20 percent deposit, however, your monthly repayments drop to a much more affordable $2,827.
It’s tempting to want to jump onto the property ladder as quickly as possible, but it’s not necessarily the smartest financial move. While a low deposit allows you to buy your home sooner, it means you are borrowing more money so you end up paying more interest in the long term.
Besides, the deposit and lenders mortgage insurance are not the only upfront costs when buying a home. You must also factor in the solicitor’s fees, property stamp duty and your moving costs. Now is as good a time as any to start saving.