The tough question facing first home buyers: spend more time or more money?

The tough question facing first home buyers: spend more time or more money?

Many first home buyers are having to make the tough choice between waiting additional years to save a large deposit or spend thousands of dollars extra to buy a property sooner.
 
It would take 7 years and 9 months to save a 20 per cent deposit with stamp duty for a typical Sydney apartment, if a first home buyer was stashing $400 a week into a savings account accruing 1 per cent interest, according to a RateCity analysis.
 
An apartment in Melbourne would take 5 years and 3 months under the same savings regime. For Brisbane, it’d take close to 3 years and 8 months.
 
And then there’s houses. Buying a house in the aforementioned cities would add an additional 2 to 4 years in savings time. Saving a 20 per cent deposit for a house in Sydney, for instance, would take longer than a decade.

Buying unit ratecity deposit.JPG

Buying home ratecity deposit.JPG

Time vs Money

Banks generally charge lenders mortgage insurance (LMI) to first home buyers who have a deposit less than 20 per cent. The fee -- typically costing thousands of dollars extra -- helps banks hedge the risks of a mortgage default by adding extra cash to their balance sheets. 
 
A recent government report found people could get into the property market years quicker if they could secure properties with smaller deposits and not have to pay LMI.
 
Buying a property with a smaller deposit may mean people can save on rent, but this could be offset by the cost of servicing a more expensive loan, Sally Tindall said, research director at RateCity. 
 
“For most lenders, a deposit that falls short of 20 per cent means you’ll have to fork out for LMI which can run well over $10,000,” she said.
 
“It also means your monthly repayments will be higher and you’ll pay more in interest over the life of your loan; two factors that could potentially be offset by rising property prices, but in this market, isn’t a given.”
 
Budding buyers should keep four things in mind before making a decision, Ms Tindall said.

  1. Spend within your budget
  2. Find a savings account with a competitive interest rate
  3. Compare mortgage interest rates and calculate repayments to help you work out how much you’re comfortable borrowing
  4. Find out what grants or government subsidies are available.

One way to help people figure out if paying LMI is worth buying a property sooner is to consider the affordability of servicing the loan, Kent Lardner said, a location analyst and chief executive of SuburbTrends.

“My personal view is affordability is the elephant in the room for first home buyers,” he told RateCity.

“I personally would never shy away from using LMI, as long as you can afford the repayments.

“Given current interest rates, I would focus very much on how you can service the loan.”

A government subsidy that could save four years

The federal government has made it possible for thousands of people to buy a property with mortgage deposits as small as 5 per cent while not needing them to pay loan mortgage insurance.
 
The first home loan deposit scheme makes it possible for people to secure a mortgage with a deposit as small as 5 per cent. This is because the government’s $400 million scheme guarantees the remaining shortfall; the gap between the borrower’s deposit and 20 per cent. 
 
The scheme has helped first home buyers enter the property market four years quicker on average, the first report on its progress claims. In NSW, people were able to enter the market five years quicker. 
 
About 10,000 applicants are approved each financial year for the scheme.

A forecast of falling property prices: bank

The traditionally steady property market is enduring a period of volatility due to the uncertainty brought by the COVID-19 pandemic, according to banks, analysts and industry experts. 

Banks have forecast drops in major city property prices, although some have revised their estimates as the country is generally dealing with the pandemic better than expected. 

While some investors believe a drop in property prices presents opportunity, Ms Tindall said trying to time a property purchase in the midst of a pandemic is going to be tricky. 

“If you are looking to buy your first place to call home, it’s worth taking a step back and looking at the bigger picture,” she said.
 
“Does it suit your work life? Does it suit your lifestyle? And most importantly, is it something you know you’ll be able to afford, even if things get worse financially?
 
“Bargain hunters are likely to spend the next few months trying to pick the ‘right’ time to buy, and even then, there’s a chance they won’t get it right.”

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Learn more about home loans

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

How do I save for a mortgage when renting?

Saving for a deposit to secure a mortgage when renting is challenging but it can be done with time and patience. If you’re on a single income it can be even more difficult but this shouldn’t discourage you from buying your own home.

To save for a deposit, plan out a monthly budget and put it in a prominent position so it acts as a daily reminder of your ultimate goal. In your budget, set aside an amount of money each week to go into a savings account so you can start building up the ‘0’s’ in your account.  There are a range of online savings accounts that offer reasonable interest, although some will only off you high rates for the first few months so be wary of this.

If you aren’t able to save a large deposit, you can consider ways of entering the market that require small or no deposits. This can include getting a parent to act as guarantor for your home loan or entering the market with an interest only loan.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile