Recent Buying Selling Lifestyle
Recent Buying Selling Lifestyle
Buying

Saving up a deposit - How much do you really need?

07-Nov-2017
Written by Christopher Igoe
Below is some great expert advice from Michele Hutchen from Mortgage Choice Gymea.

There are 2 ways you may be able to go, genuine Savings or use a guarantor

1. Genuine Savings
Some lenders advertise that you only need a 5% deposit as they will lend you 95% of the property value (some lenders even more). Not easy, but it doesn't sound too bad.

The problem is, this isn't the whole deal. What they're not telling you are the costs associated with the purchase. You'll need to have the cash to cover those too! They typically represent a further 5%-6% of the purchase price and include things like Stamp Duty, Mortgage Insurance, Legal Costs, Government fees etc etc etc.

The new First Home Owners Grant will absolutely help with that of course - no stamp duty if you buy for $650,000 or less (a saving of approx $24,000). Purchases between $650,000 & $800,000 will be eligible for stamp duty discounts. So all that's great.

Still, how much cash will you need?
Lets assume you buy for $650,000. Stamp Duty is waived. You will need around $52,500. How does that work? Well, the Bank is lending you 95% of the purchase price so you need the other 5% - $32,500.

No stamp duty, but there will still be around $3,300 in other charges (mainly your legal costs).

The big "extra" is the mortgage insurance. This is an interesting point. You will no doubt shop around for the best loan / lender. You'd be mad not to. But did you know mortgage insurance changes from lender to lender?

In this scenario we have lenders charging insurance ranging from $16,500 to $27,000. That is a MASSIVE difference. You might be getting the best rate, but if your lender is charging you $11,000 more mortgage insurance you could actually be going backwards! And that's another $11,000 you would need to save. Ouch!
So back to our scenario. You'll need 5% ($32,500) + legal costs (around $3,300) + mortgage insurance ($16,500) = $52,300.

2. Guarantor
This can be an easier and cheaper path if you're lucky enough to have a parent who can help out.

The Bank will take a mortgage over their house, as well as your new house, to secure the loan. There is a little more to it than that of course (we want to structure the loan in such a way that the guarantor is protected as much as possible).

What does this mean to you?
- Possibly no need for a cash deposit AT ALL! Of course, the more cash you have the less you need to borrow which is always good, but if saving the money just isn't an option...
- No mortgage insurance payable! In this scenario, you have just saved $16,500 - $25,600 straight away. That's a serious win.

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