How much are you required to save for a house?
When applying for a home loan to purchase a property, two boxes that need to be ticked.
1. Can you prove that you can afford the loan required using the lender’s servicing calculation?
2. Do you have enough savings to contribute to the loan?
Both of these requirements must be met, and if they are then there’s a good chance you’ll have your loan approved. But what is the required savings amount?
Ideally the greater deposit you have and the less you need to borrow, the higher your chances of securing your dream home. However, the more accessible funds you have available, the less risky the loan is from a lender’s perspective.
What to do if you have a deposit of less than 20%
Having a smaller deposit amount is still sufficient, however, it can come at the cost of a higher interest rate (depending on the lender) and the additional fee of Lenders Mortgage Insurance (LMI). Banks will still be willing to lend you the funds, but will need to have their loan insured.
The cost of this insurance premium is passed onto the borrower, despite the insurance being for the bank’s protection in the first place. The insurance covers the bank against default on the loan by the borrower. This premium is a one-off payment, paid at settlement, and typically added to your overall loan. For example, a property valued at $700,000 where the buyer borrowed a base loan amount of $595,000 (85%) could see the insurance premium reach anywhere between $6,500 to $11,000 depending on the lender. If you have less contribution and need to borrow a greater amount, this premium will increase.
What’s the minimum deposit required?
As a general rule, most lenders will cap the loan at 95% of the purchase price (if buying as an owner occupier), however this rate will need to include LMI, so again in the above example, you would realistically, need factor in 14% of the purchase price, so that you can be confident that any Stamp Duty fees are covered as well.
Sometimes Stamp Duty concessions are available or buyers may be eligible for Government grants, incentives and exemptions. So it really pays to look a little deeper into the numbers to figure out what’s available to you, the total amount you’re required to pay and your ability to fund mortgage repayments once you secure your dream home.
