The deposit
The deposit – the ‘down payment’ as they call it in the U.S. – presents the biggest obstacle to homeownership for most buyers, especially first-time buyers and those in lower income brackets. Until the GFC it was standard practice to offer people with less than 20 percent deposit saved to take out mortgage insurance and borrow up to 95 percent against the value of the property to be purchased.
Most mortgage lenders require a cash down payment and now require a minimum of 10 percent or 20 percent of the sale price. Most lenders will require that mortgage insurance be taken out when the threshold rises above 80 percent in terms of the loan-to-valuation ratio (LVR). That is, if the home buyer is looking to get a mortgage and has only 10 percent of the deposit required then an extra cost may be required of several thousands dollars to pay for mortgage insurance. As part of the deposit the buyer should also factor in stamp duty unless they are exempt or are in a state that exempts them from needing to pay which for example is the case in NSW for first home buyers.
One of the challenges facing any first home buyer is not just the deposit requirement but also whether they are considered “credit worthy”. In some cases a mortgage lender may be willing to overlook credit blemishes, approve your loan without verifying your income or both. But this is less likely today with a more credit conscious lending environment. The private mortgage insurance is there to protect the lender.
In the case of mortgage refinancing it is normal that the borrower is looking to release some of the equity in their home through the mortgage refinancing deal. Competitive rates are available but it is possible to lower your mortgage repayment or afford a more expensive house by putting more money down, in other words to have additional savings outside of the equity in the home.
The battle to get over the deposit hurdle is a serious one but it is one worth fighting for, not just to get over the line of the home purchase but also to keep repayments down. If the home buyer has a limited budget for servicing the mortgage and uses the mortgage calculator or the home loan comparison tools, they will find that even $20,000 additional deposit can trim repayments by hundreds of dollars over a full year.
In simple terms whether you are a first home buyer or a home owner seeking to refinance their mortgage, the bigger the deposit or down payment, the more expensive the house you can buy.
Christine Spencer says:
January 22nd, 2011 at 12:47 pm
It is imperative when purchasing a property that the buyer has at least 10%-20% of the purchase price as this will drastically decrease the amount of repayments. If the buyer does not have a sufficient deposit normally they will incur mortgage insurance which can be rather costly and will erode any capital gains. Try and avoid unnecessary costs. The best method to source a deposit would be to use the equity in your own home. If that is not a possibility the best strategy would be to save money each week from your income until you have accumulated sufficient funds. Having a deposit will also give you more access to lenders and possibly lower interest rates.