Ok ladies, this week we tackle the eternal property dilemma:
“I’m a single mum to a six year old and I am hoping to have a house deposit together early next year, but I am not sure whether I am better off saving a larger deposit or just getting into the market as soon as I can. What do you think?”
Now, each mortgage broker, real estate agent or financial adviser will have a different take on this but here is my personal opinion on the big deposit v “just getting in” debate.
In general, the bigger the better.
A larger deposit can benefit you in a few ways:
- It gives you wiggle room with the bank if things go wrong and you struggle to make repayments
- Once you borrow over 80% of the value of a home, not only is it harder to get a loan, often the interest rates aren’t as competitive, but you are also liable to pay something called Lender’s Mortgage Insurance. Basically this is a premium you pay for being “high risk”. The bank takes out an insurance policy to cover them in case you default, and they pass the cost onto you. Let me be clear – this insurance policy protects the bank, not you. As you can imagine, this can get quite expensive and in fact, the premium doubles once you cross 90%.
- Any equity you gain as a result of an increase in the value of your home is only of use to you if you sell (or if you were to take on more debt) whereas if you have some cash equity on your mortgage it could potentially be drawn on down the track.
Other factors to consider
Where you are looking to buy is also important.
Many experts suggest that Canberra still has a little way to slow down before going back up, Sydney appears to be slowing and speculation is that there is an oversupply of apartments in both Sydney and Melbourne which may have a knock on effect on house prices, and Perth and Darwin are feeling the pinch from the end of the mining boom.
Now, of course the economy is a hard thing to predict and for every expert saying a market is slowing there will be another arguing the opposite.
Even so, I believe that under the circumstances you will not miss out in the long run by building up a bigger deposit before buying. In my opinion it is certainly better to wait a few extra months than risking the alternative of not being able to afford the mortgage once rates start to rise, being forced to sell and potentially losing money in the process as a result.
If it were me…
Here is what I would do:
- Do my market research, including speaking to property experts and reading up on research houses such as SQM Research and Corelogic.
- If property prices are an issue, give serious thought to living somewhere more affordable, it may sound daunting but its not impossible!
- Save up as much of a deposit as I can. 20% of the value of the home you want to buy, plus 5% to cover stamp duty and other fees is ideal (unless you are a first home buyer and eligible for concessions which is worth checking!) Use the Women with Cents Stamp Duty Calculator to get an idea of these costs.
- Investigate the cost of lender’s mortgage insurance – the Genworth LMI premium calculator is a great user friendly tool.
- Check out the Women with Cents loan repayment calculator and see how big a mortgage I could afford at interest rates of 6-8%. I would use this as my guide when deciding on what price range to look at, instead of going by what the bank is willing to lend me.
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The information provided by Women with Cents is general in nature. It doesn’t take into account your objectives, personal financial situation or needs. Think of it as educational material in which to help you make more-informed decisions. We recommend you obtain financial, tax and credit advice specific to your situation before making any investments or financial decisions.
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