Written by Ivan Fletcher
The leap from Renter to Home owner may be a smaller step than you think. There are generally 2 'financial' hurdles to buying your first home but they might not be as burdensome as you think.
The two financial hurdles to buying your first home are:
- Cash Flow to afford the Loan Repayments
- Saving Up a Deposit
With interest rates the lowest they have ever been, it is possible to buy a home with the same weekly budget as a renter.
Example $550 per week Rent => translates to Home Purchase of approximately $550,000
Rental Cost is replaced with :
- Loan Repayments ($480 per week) (Assumes you have at least a 10% deposit and a HL rate of under 3%).
Home Owner costs (council rates and water and Home insurance) ($70 per week)
So even if you do not have any additional cash flow capacity to what you pay in rent now a home loan may be affordable for the same cost as your rent.
SAVING A DEPOSIT
The bigger hurdle to buying a first home is without doubt saving up a deposit.
How much Savings Deposit Do you need ?
The Maximum Deposit Level
The banks would love you to have a 20% Deposit plus purchase costs
Example: for a $550,000 purchase you might need - $125,000 Savings
($110,000 Deposit + $15,000 Stamp Duty and legals).
The Lowest Deposit Possible
Plenty of banks will let you borrow up to 90% – even 95%, of a property’s value. These ‘loan to value ratios’ (LVRs) show the maximum a bank will lend as a percentage of your home’s market value. So it can be possible to buy with as little as a 5% deposit.
Example: for a $550,000 purchase you might need - $42,500 Savings
($27,500 Deposit + $15,000 Stamp Duty and legals).
Loan Mortgage Insurance
There’s a reason why 20% is seen as the ideal down payment. When you borrow more than 80% of your home’s value, the bank makes you pay Lenders Mortgage Insurance (LMI).
This type of cover protects the bank, not you the home owner, and it can be a major upfront expense. Research suggest that at least half of the “millennials’ are not aware of LMI or it’s impact on their borrowing.
If you buy a $550,000 home with a 10% deposit (an LVR of 90%), the LMI premium could land somewhere around $9,000 as a ball park. On a deposit of 5% (LVR of 95%), LMI could blow out to approximately $23,000. LMI will differ from bank to bank.
There are several strategies and government grants available to help combat/reduce the impact of LMI (refer previous Hudson article).
Most banks will simply add any LMI on to your Home which would then increase the monthly repayments by $20 to $25 per week (using the above example).
Why you should not be put off my LMI ?
Whilst LMI appears an unnecessary cost the alternative is to take potentially several more years to save up for the higher deposit. However if property prices increase by more than the Cost of the LMI ($23,000 in this example) you could be worse off ending up with a much higher mortgage repayments.
In Summary – The leap from Renter to Home owner may be a smaller step than you think. As with all things it is a balance in coming up with a loan structure that is right for you in minimising both interest rates and Loan Mortgage Insurance.
Contact Hudson Finance Officer Nicole Green on 1800 804 296 if you would like some feedback on your capacity to make the leap.