Mortgages and Financing

Lenders over the period of time have applied more and more stringent lending criteria making it difficult for the borrowers to borrow money for their new home.

In order to sanction a home loan, the lender verifies whether a borrower has genuine savings or not.

Each lender has its own credit policies and methods to assess your savings. Usually lenders look into your past 3 months savings from your income and contributions from other avenues including family assistance, gifts, bonuses and incentives.

How Much Deposit Do I Need?

If you are planning to buy a property for your own occupancy, then you may be required to pay a minimum 5% of the total value of the property as a home loan deposit and this will vary depending on a number of factors including the type of loan you are seeking as well as the lender you choose.

If you are looking to buy a property for investment purpose, you ideally require to pay a minimum 5% to 10% of the total value of the property as a deposit.

Savings

You have many ways to save money for your deposit which will not require you to make major changes in your lifestyle. A good savings plan and some discipline in life can help you to save money for the deposit you are looking for your property. This can be done in the manner as follows:

  • draw down the essential expenses every month which include rent bills, utility bills and expenses on food;
  • subtract the amount of your essential expenses from your income after deducting applicable taxes; and
  • save the rest of your income for your deposit.

You may also know that if you can deposit a substantial portion of the total value of the property as the earnest money, then you will have to borrow less money from the lender as a loan.

At first you need to work out how much you can afford to spend on your deposit or how much you can save for your deposit and how much you can repay back to the lender. This will help you to understand what your current financial position is and what you can afford.

It is also helpful to calculate your loan to value ratio (LVR) by dividing the amount of your home loan by the total value of the property or purchase price.

Lenders use this method of calculation to assess your risk profile. If the LVR is more than 80% of the total value of the property, you are considered to be of high risk profile and the lenders will probably charge you a Lenders Mortgage Insurance (LMI).

LMI is an insurance which protects the lenders, in case there is any default in repayment of the loan.

If your LVR is high, it means that the risk involved in repaying back the loan is high because you are borrowing a high percentage of total value of the property.

In case you do not have a deposit for your home loan, you have other options available which can help you in getting a home loan. These include:

  • guarantee from your parents;
  • cross collateral security;
  • term deposits; and
  • equity.

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