How much Deposit do I need?
It's possible to buy a home with very little deposit, but there are a number of reasons why it makes sense to save a decent deposit before you apply for a loan.
The number one benefit is that you will have access to a broader choice of home loan options from a great variety of lenders. When assessing a loan application, lenders look at factors like employment history, income, loan amount and deposit as they want to know whether you can pay back your loan on time. A higher deposit helps in the lender's assessment of your application because it demonstrates your ability to manage and control your finances.
As a response to the global economic crisis, many lenders have tightened their lending criteria and are increasingly reluctant to provide access to high Loan Valuation Ratio (LVR) loans.
In layman's terms, LVR is the amount you are borrowing represented as a percentage of the value of the property being used as security for the loan. The higher the LVR, the higher the risk is to the lender.
The LVR that you can borrow is dependent on the loan amount you are wishing to take, the location of your property, your credit history and the type of loan you are applying for. Low doc applicants (no income evidence) can generally borrow up to 60 per cent LVR and up to 80 per cent LVR if your financial position is strong. Full doc applications (income evidence provided) can borrow up to 80 per cent LVR, or even up to 90 or 95 per cent if the lender deems you to be in a strong financial position.
The downside of an LVR over 80 per cent of the property value is that you will be charged Lenders Mortgage Insurance (LMI). This insurance protects the lender in case you default on your loan payments and the lender has to sell your property at a loss. It allows the lender to approve your loan without the risk of losing any of their money.
The best way to avoid the LMI expense is to save a deposit of 20 per cent or use another property as joint collateral. If neither option is available, make sure you know exactly how much LMI you will be paying before you go ahead with the loan. This is where your mortgage broker can be of great assistance in negotiating the best deal with the lender, as well as explaining the fine print and helping you fill out the paperwork.