Buying Your First Home: Saving For A Home Loan Deposit

With interest rates at record lows – many Australians are asking the question – “How much do I need for a deposit to purchase my first home?”. This question will then determine the amount of your loan and ultimately your borrowing power.

The bigger your deposit, the smaller your loan will be and the less you’ll pay in interest. We recommend that you save as much as you can, an acceptable amount will be 20% of the property price if possible to achieve a 80% Loan to Value Ratio. If you exceed 80% you will incur Lenders Mortgage Insurance (“LMI”) which protects the lender in the event that you default on repayments. It’s a one-off cost that’s added to your loan amount, so you don’t have to pay anything upfront.

To apply for a home loan, you need to show evidence of regular savings over a period of at least three months. This can include a mixture of cash, shares, and equity in an existing property, Term Deposits, an inheritance or gifts.

Why the size of your home loan deposit matters?

• It gives the lender an idea of what you can afford to repay regularly

Regular savings over a period of time, rental income, superannuation and investments as well as your liabilities all work together to give lenders an indication of your ability to maintain your home loan repayments. Lenders will look at these and your income sources (salary, investments, and dividends) to assess how much money they’re willing to lend to you.

• It impacts the interest rate lenders may offer

The deposit you have available when you come to apply for your home loan can have an impact on the interest rate of the loan. With more savings – the better the LVR and the more negotiating power you have. Redwood Home Loans mortgage brokers have access to a wide variety of lenders to find the best rate and most suitable product to meet your needs.

• It affects how ‘risky’ you are as a customer, and whether you need to pay Lenders Mortgage Insurance (LMI)

Lenders are providing money to you and therefore will provide loans based on ‘credit risk’. Lenders use a simple Loan to Value (“LVR”) calculation to assess how risky they consider offering you the home loan may be and is calculated as the loan amount divided by the purchase price. The LVR looks at the amount you wish to borrow in relation to the value of the property you’re looking to purchase. The higher the LVR, the more risk for the lender.

Five savings tips for first home buyers

Saving for a deposit can be hard work – it takes planning and generally will involve formulating an investment strategy for you.
Here are five steps to saving money for your first home loan deposit:

1. Formulate an investment strategy to purchase property, this will determine the type of property and purchase price required
2. Create a budget, identify the spending pattern and tuck away saving on a weekly basis. It’s very important to stick to the budget, perhaps maintain a separate account for savings.
3. Cut back on unnecessary expenses and leisure such as travel, nightlife, dinners. You don’t have to destroy your social life to save money – slowly remove the luxury over a few weeks/ months.
4. Pay off existing debt such as credit cards. Any debts with high interest rates should be identified and paid out if possible. You may like to consolidate your debt to save on interest and fees.
5. Work harder – not a popular one but you may be required to obtain a part time job to increase your savings.

Disclaimer – The content has been prepared without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. The author and Redwood Advisory disclaim responsibility for reliance on the information detailed in this article.