How much is enough?
It's been a while since I've taken the time to sit and write something so I've decided to discuss something I've been seeing a lot lately. I meet with plenty of people who are looking to buy property but aren't always ready as far as a bank is concerned. The following discusses how much money is enough to get you ready to go house hunting.
Generally speaking most lenders will allow you to borrow up to 95% of the value of a property. If you're looking to buy a $500,000 property you can borrow $475,000 from a bank to pay for it. There are lenders that will lend more but if that's something you need it is something that has to be assessed on a case by case basis and you should definitely get in contact with a qualified broker (there's a contact form on this page to a great one if you need) to help you with this scenario.
The reason for needing a 5% deposit is multi faceted. A bank wants to see 5% because it proves that you are able to save money and it lowers the risk to both the bank and to you from lending money to you. In the situation that the security property does need to be sold to repay the loan having a 5% buffer for the total value of the property protects all parties involved. Lenders Mortgage Insurance also protects the lender but more about that shortly.
Assuming you have your 5% deposit you would probably think it's about time to start house hunting, not quite. On top of making a bank happy to lend you money because you have proven your ability to hold enough money to purchase a place of your own you also need to pay for Stamp Duty out of your own pocket. Stamp Duty has been a hot topic of late as it is quite the barrier to buying a house and stops some people from selling due to needing to pay the tax on another property. If you want to calculate the cost of stamp duty there's a great calculator here. On a $500,000 property Stamp Duty in NSW is $18,262. All of a sudden you need $43,262 to pay a deposit and Stamp Duty. Still not time to go house hunting yet though.
Earlier I mentioned Lenders Mortgage Insurance (LMI). It's an insurance policy most banks' insist that anyone who borrows over 80% of the value of a property takes out. It's not exactly cheap and there's no blanket answer as to how much it costs, there are many variables that affect the cost of LMI and this is something you are concerned about you definitely need to reach out to a broker or a bank to find out what this could cost. I am able to tell you the cost for a whole heap of different banks and it is different for every bank. You need to pay for this on top of Stamp Duty and the deposit for the bank. The larger your deposit the smaller the LMI premium and the value of the property also affects the cost. There is a slight glimmer of hope though with LMI, some lenders will allow you to add the cost of LMI to your mortgage or at least part of the cost.
Last bit of bad news, you have to pay for conveyancing to be conducted on your property when you purchase a residence and having pest and building inspections is definitely adviseable when purchasing a property to ensure you are not inheriting any issues. Conveyancing is just the preparation of legal documents regarding your property purchase and needs to be completed by a qualified conveyancer or solicitor. This service can cost upwards of $1500 but it's best to get in touch with a qualified professional to enquire about the costs of their services. The inspections can cost a few hundred dollars but again you would need to get in touch with the professionals that offer these services.
To finish on a high note you can technically buy a house with no deposit. If you are fortunate enough to have a family member who is willing to use the available equity in their own property you can borrow 100% of the purchase price of a property plus stamp duty and the other fees associated with purchasing property. The family member is considered a guarantor but that's another whole discussion, if you're interested in finding out more about guarantors, give me a call.