I know it’s easier said then done, but first time buyers (or anyone else for that matter) should try and save as large a deposit as possible when buying a home. Sure, meeting day to day living costs and the increasing cost of property makes this a daunting challenge, but there are some major financial and personal benefits of contributing a reasonable amount of your own money towards the purchase of your dream home.
So what’s a reasonable amount? Ideally you should aim for 20% but as a minimum try and save at least 10%. On a home valued at $350,000 this translates into a deposit of between $35,000 and $70,000. So we’re talking about fairly sizable sums.And now on to the benefits of which there are three big ones. The first big benefit is that your chances of getting your home loan approved will be much better because lenders will look more favourably on your application when you can demonstrate a savings track record – this shows your ability to control and manage your finances. In addition, lenders will see you as a less of a risk because you’re borrowing less of a proportion of the property’s value.
The second big benefit is that a larger deposit saves you money. You’ll pay less interest because you’re borrowing less (and this can add up to tens of thousands of dollars in interest savings). The other saving you’ll make is on Lenders’ Mortgage Insurance (“LMI”). LMI is an insurance policy designed to protect the interests of the lender and is applied when the amount borrowed exceeds 80% of the property’s value. This can add up to many thousands of dollars of extra cost which can be avoided altogether if you can save a 20% deposit.
The third big benefit is that a larger deposit gives you some emotional and financial security in case things go wrong and you find it difficult to meet your mortgage repayments. Lenders are likely to be more accommodating in the short term to help you work through financial difficulties when there is more unencumbered value in your home and support you with options like repayment breaks or refinancing. Someone who has less than 10% equity in their property may have little room to manoeuvre when times get tough and could even find themselves in negative equity territory if their debt builds up and or property prices stagnate or fall.
So remember, put together as large a deposit as possible – the benefits are worthwhile and substantial.
My tip
If you want to work out how long it will take you to save a deposit divide the amount you want to save by your monthly savings. So if you want to save $30,000 and can save $1,000 a month, it will take you 30 months or two and half years (30,000/1,000).
