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Calculate your borrowing power
Your deposit depends on the price of the property you’re buying. Calculating your borrowing power in advance helps you lock in a budget for your purchase, bringing you one step closer to figuring out your deposit amount.
Borrowing power calculations provide a guide to what a lender may believe is affordable based on your income, financial commitments and living expenses. You do not need to borrow the full amount – it’s vital only to borrow what you’re comfortable with.
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The deposit amount
When talking about deposits, you’ll often hear terms such as LVR and LMI. What are they?
LVR – Loan to value ratio
LVR is the percentage of your loan against the property’s value. Most standard home loans are based on borrowing up to 80% of a property’s value, which means you’ll be contributing a 20% deposit.
Many lenders are also happy to consider applications with as little as 5% deposit (95% LVR). However, they will cover themselves for the risk and make the borrower pay Lenders Mortgage Insurance (LMI).
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LMI – Lenders Mortgage Insurance
LMI is an upfront premium you pay that protects the bank in case you default on your repayments. This is not an insurance policy for borrowers – you’ll still be liable for your debt. LMI premiums are tiered based on property value and LVR. The higher the LVR, the more you’ll pay. Some lenders will allow you to add your LMI premium to your loan, but this will increase the interest you pay over the home loan term.
Buying with a smaller deposit
In an ideal world, we would all start our property journey with a 20% deposit. With ever-increasing property prices and living costs, this option may not be feasible for many home buyers.
If you aim for a smaller deposit, your home loan amount will be higher, and you’ll need to submit a strong application showing stable employment, evidence of savings and a history of meeting your financial commitments. Both the lender and the mortgage insurer will review your application to assess the risk of lending to you.
Benefits of a bigger deposit
There are some advantages to holding out for a bigger deposit.
- Greater choice of lenders
- Less to borrow upfront
- Reduced or no LMI added to your loan
Additional purchase costs
In addition to saving for a deposit, you’ll also need funds for costs associated with the purchase.
- Home loan application fee
- Building and pest inspection
- House and contents insurance
- Mortgage registration
- Stamp duty
- Conveyancing fees.
These costs could add up to 5% of the purchase price depending on your state and any previous property purchases.
Boosts for first home buyers
First home loan deposit scheme
First home buyers may be eligible for the federal government’s First Home Loan Deposit Scheme (FHLDS). Under this scheme, the government provides a guarantee to lenders, so you don’t need to pay LMI. Places on the scheme are limited, and you’ll need to meet the eligibility criteria to be accepted.
First Home Owner Grant
Some states are still offering a First Home Owner Grant (FHOG) to first home buyers who are building a new home. The grant value and eligibility criteria vary from state to state, so check out the FHOG website for more information.
- Useful reading: Thinking about buying your first home?
Finding a loan that’s right for you
With access to a wide range of lenders who are happy to consider applications with smaller deposits, we’ll find one that works for you. Give the Yellow Brick Road team a call to find out how we can get you on track for a new home.