Shall I save 10% or 20% for my first home purchase?
This is one of the questions plenty of people ask themselves when deciding on when they are thinking about buying a home.
Traditionally in the Australian real estate market, if you are looking for a home that is house, townhouse, or dwelling a 5-20% deposit is sufficient for a home loan deposit. If you are looking to buy an apartment in an apartment building the deposit amount might be higher.
The main factors to consider for buying a property is the costs that associate with buying a property, and the amount that needs to be saved as an upfront deposit to get into the market.
If you buy a house with a 20% deposit, you will be waived from paying LMI which stands for Lenders mortgage insurance. LMI is a prudential positon lenders take to insure themselves in the risk that (you) the borrower, are unable to meet your loan repayments. LMI does not go towards the principle of the home loan. So after borrowing for a home loan, the LMI that people pay would not pay towards the purchase price of property.
The amount that you borrow will also impact the percentage of LMI aswell. If you have below than 20%, LMI is applied and the interest rate can range from 0.475%-2.609% for a loan amount of less than $300k with a deposit of 19.99% to 5%. Then 0.568% to 4.613% for a loan amount between $300k to $750k with a deposit between 19.99% to 5%. The higher the deposit, the lower the percentage of LMI.1
So someone might ask is there ever a scenario on when it is better to only save 10% and pay the LMI, or save the full 20%, and be free from the extra cost? The answer to this question can vary. One of the main factors from a financial standpoint would be how the economy, and the property markets are performing. For example, in the year 2017, the annual growth rate in Melbourne for the median house was 13.2%2. In 2016 10.3%, and in 2015 14.5%3. So over those 3 years averaged 12.6% annually. With a 10% deposit on a $500k property purchasing in 2014-2017, the LMI would have equated to 2.618% on the price, so $13,090. Though the annual increase would receive with a 12.6% appreciation is $63,000.
Some people are willing to pay $13,090 to make $63,000. Though property markets are fluid, and past performance does not indicate future performance. Over the 2017-2018 September quarter, prices decreased in Melbourne by 3.4%4 and there is no certainty on the exact time that median prices will turn back around and start to increase again, and at what rate the increase will be.
Dwelling types, suburbs, the economy and personal circumstances all need to be taken into consideration when deciding to purchase a property. It is sometimes the largest purchase that people make in their lifetimes. Stamp duty and it’s possible concessions, FHG(First Home Owners Grant), and body corporate are also other things to consider when buying a property.
Here at GTM finance we consider the quantitative as well as qualitative considerations when it comes to providing information for purchasing property. Reach out to us today for a consultation.
1https://www.homeloanexperts.com.au/lenders-mortgage-insurance/lmi-premium-rates/
2https://www.abc.net.au/news/2018-01-20/house-price-growth-slows-in-melbourne-but-strong-annual-result/9343406
3https://www.domain.com.au/news/melbourne-median-house-price-nudges-800000-with-rises-for-four-consecutive-years-20170123-gtvh6k/
4https://www.abc.net.au/news/2018-10-01/melbourne-and-sydney-continue-to-lead-house-price-decline/10324270
