Home deposits are one of the most important parts of the buying process. As a first time buyer, there might be some confusion about this.
How much deposit do I need?
Home loan deposits are needed as evidence that you can service the repayments on a home loan. As a general rule, if you’re buying your own home, 20% of the purchase price will be needed as a deposit.
However, most lenders also offer loans that require a smaller deposit of 10% or even 5% of the purchase price, but you’ll need to factor the cost of lenders mortgage insurance (LMI) into your calculations. LMI is designed to offer protection for a lender in case you default on your mortgage repayments, and you will need to take out cover if you borrow more than 80% of the purchase price (or your deposit is less than 20%).
Generally speaking, the larger your loan-to-value ratio (LVR), the more expensive your LMI premiums will be.
Related: What is Lenders Mortgage Insurance?
The required deposit can also vary if you take out a low doc loan. Designed for self-employed borrowers who can’t provide the usual evidence of income during the loan application process, low doc loans often feature a lower maximum LVR. Depending on the lender, you may need to provide a deposit of 20% or even 40% of the purchase price, as well as take out LMI.
Finally, if you’re borrowing to buy an investment property, your deposit can usually be between 5% and 10% of the asking price. Contact your lender to determine exactly how much deposit you will have to pay.
Calculate how much deposit you will need
To calculate how large a deposit you'll need, get the purchase price and multiply it by 20 and then divide by 100. This will show you what your deposit would be if you provided a 20% deposit. Using this equation, you can replace 20 with any amount your lender will allow to find out how much smaller deposits would be.
Deposits for your home
Buying a house is a big step for everyone – a big investment that requires a big amount of money. If you are a first-time buyer, it helps a lot if you have knowledge about the process of buying a house and your rights as a buyer. You might not be the one who will conduct the transaction, but it will save you a lot of trouble and money when you have know-how rather than none. Be aware, though, that these rules depend on several factors – the state where you live in and how the house is sold.
There are two methods how you can buy a house – through a private settlement or an auction. In a private settlement once you found a house you like, the first step is to make an offer and mostly give an earnest deposit. As the term suggests, this deposit does not guarantee that you get the house, but rather, it is just a proof that you are earnest in buying the house. If your offer is accepted, you draw up a contract and sign it. Then you will be asked to make a deposit for the property you have just bought. After this, the seller and you will draw a final settlement that is reasonable for both of you. In most cases, the final settlement is usually 30 to 90 days.
When you buy your house in an auction, the rules can be very different. If you won the bidding, you will be asked to give the home deposit and sign the contract right then and there. Unlike buying a house through a private settlement, buying a house in an auction does not entitle you to a cooling-off period.
What about insurance?
After the home deposits are settled, your next question will be about insurance. When you buy a house, there are two types of insurance you will need to be most familiar with – mortgage insurance and home insurance.
This insurance is usually required by the loan company if you are paying less than 20% of the purchase price as a down payment. This serves as a guarantee to the lender that the mortgage will be paid even if you cannot. More so, when you get mortgage insurance, you don’t have a choice how much premium you have to pay especially if your loan is up to 80% of the purchase price.
Another type of insurance that might concern you is the home insurance. There are two obstacles you face concerning this – will you get insurance after you exchange contracts and will you draw up your own home insurance? These are critical questions you need to address. Just be sure to ask your solicitor’s advice on this matter to avoid missteps.
When to get home insurance?
This question is very important since you might be excited about getting the property insured. Most commonly, insurance is drawn after the settlement is done. However, you might be required by the loan company of the mortgage documents to draw up insurance after the exchange of contracts.
Should you draw up your own insurance?
Most likely, the seller will tell you that there is already an existing insurance policy that covers the property and all you have to do is continue it. Though it may seem a nice offer and will save you the extra work, it is still advisable to get your own insurance. Why? For one, you don’t have an idea what the policy covers and to what extent. It is therefore better to draw up a policy you are familiar with than have trouble in the future because you know nothing about the insurance policy you are holding.
There are a lot of processes you have to follow when buying a house. These legalities and figures can confuse you. However, if you have an able and efficient solicitor, you will be able to settle the transaction smoothly.