Understanding Finance: Mortgage for First Home Buyers

A first-time home buyer does face a number of dilemmas but the biggest one is about the finances. Probably the first dilemma is, “What size home deposit I might need before getting finance to buy a property”.

Many buyers are skeptical about waiting until they have 20% of the buying price saved or whether they should buy with whatever bare minimum required, even if it might mean wearing the extra cost of LMI (Lenders Mortgage Insurance) that can cost several thousand dollars.

The fact is that a minimum of 5% deposit plus costs is what is basically required. Costs linked with buying a residential property (including stamp duty & legal fees) are normally about 5% of the buying price.

However, there are several other choices for first-home buyers such as a guarantor loan or rather the use of gifted funds that could mean a first-time home buyer could buy without any deposit!

Again, a key point to note is that each bank has a different policy with regards to home deposit requirement; hence, it is an ideal option to speak with a broker who knows the policies of each bank. A lot of lenders will allow you to borrow up to about 95% of the property value; but, remember that the higher the deposit, the better.  An example can be found here however these online calculators are often too simplistic and not the whole story.  They are a great place to start a family discussion however they still miss lots of necessary costs that need to be considered.

In fact, there aren’t any hard and fast rules about how much deposit a buyer should have; however, 20% is considered as the ‘ideal’ deposit. Well, if you borrow over 80% or more of the property’s value, you should pay LMI (lenders mortgage insurance). This insurance involves paying one-off premium when taking out a home loan; so, the bigger your deposit amount, the less you ought to pay in LMI.

Most experts suggest that it is better you save for a 20% deposit. Besides, the extra saving time will allow you to perhaps do more homework regarding what kind of property you want & negotiate a much better home loan deal.

On the other hand, the advantage of a small deposit is that you can get into your new home much sooner. On the whole, it is up to you – the buyer. If you are really eager to get in to your first home, saving the minimum ensures you are able to do that; however, as mentioned above, the bigger the home deposit, lower will be your LMI premium. Therefore, if you don’t wish to pay more than you should, reaching the 20% deposit seems a sensible option. It actually rewards you with a smaller loan that comes with lower repayments & greater equity.

Besides the actual deposit amount, you will have to save money for various other expenses such as pre-purchase inspections, borrowing costs, government charges, insurance, legal fees (conveyancing), moving-in costs and so on. So, before buying your first home, plan and prepare well by understanding finance requirements / options and mortgage plans.

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