I only have a small deposit, how can I buy a house?
So all of your friends are talking about buying their first house and the excitement of being a homeowner but you can’t join in because you took that overseas holiday and don’t have a big enough deposit…….. RIGHT?
WRONG….….. Requiring a 20% deposit in order to purchase a home is a myth and you can get into a house with a much smaller deposit. Watch our video for a quick explanation on your options or read below for an example.
Take Sebastian for example; he thought buying a new car and going on a trip around the world was money far better spent, but that meant he was left with only a small amount of money to buy a home. Sebastian only has $38,000 saved and wants to buy a $400,000 house. So he would need a 20% deposit ($80,000) plus stamp duty and other costs on top of that (approx. $13,000). That’s a whopping $93,000 in order to get into his first home!!!! That will take Sebastian years and years to save based on his wage of $65,000.
So what if someone told you that you don’t require $93,000, in fact you didn’t need to save a cent more than what you’ve already got?
If, like Sebastian, you have less than a 20% deposit, you can pay the bank a once off fee called Lenders Mortgage Insurance (LMI). The bank charges you this fee as they are taking on more risk because you have a smaller deposit. The following table shows what a bank may lend to you if you were purchasing your first home, planning on living there and had a deposit of only $38,000.
Therefore with a deposit of only $38,000 Sebastian could look at a property worth up to $400,000. This is assuming he earns $65,000 and the bank feels he can afford to pay the $2,105 per month in repayments. Remembering you might be able to have people rent a room off you which will help out with the repayments.
So why would I pay the extra LMI fee?
Well Sebastian could avoid paying the LMI but he would need to save the $93,000 that is required to have a 20% deposit and pay for stamp duty etc. This may take him a couple of years as it is a large sum of money. Meanwhile if the house went up by only 3.30% during this time, it would have gone from costing him $400,000 to $413,200. So technically the house would cost Sebastian $13,200 more to buy….this is the same as the LMI fee he would have paid to purchase the property, so he would pretty much be even. What if we assume the house went up by 5%? The house would now be worth $420,000 and Sebastian would have made more money than the $12,500 LMI he was required to pay.
We have even heard stories where people have never been able to purchase their desired property because whilst attempting to save the 20% deposit, they could not save as quickly as the house price was rising.
LMI can differ depending on the varying factors but as a general rule, the lower your LVR (Loan to Value Ratio) is the lower the LMI fee will be.
Please note that this is an example only and should only be used as a guide. We have not taken into account your personal circumstances in any of the above illustrations. We expect that your individual circumstances will vary to the example we have provided.
Can I avoid paying the LMI fee?
Getting a family guarantee is a potential solution to explore as it could eliminate LMI altogether. Ask us for more information.
So what are you waiting for?
We can assess your personal situation and in conjunction with our partner mortgage consultants can assist you to determine how much a bank may be willing to let you borrow. We can provide you with specific cash flow estimates for your situation and determine the level of LMI which may be payable. Even if you still currently fall short of a required deposit we can assist you in constructing a budget which will help you to achieve your savings goals. Either give Tom or Nic a call on (03) 9723 0522, send us an email at email@example.com or jump on our facebook page ‘Integrity Edge’.
And remember, there is no such thing as a stupid question so ask away, we are happy to help.