2 Things to Consider When Buying Your First Home: Deposit and Income
The process of buying your first home may seem simple but there are a lot of things to consider. There are so many questions first home buyers need to ask themselves. Even before you take the first step, you have to determine how much your deposit is and how much you can afford to borrow based on your income.
In this article, we’re going to tackle both deposit and income; what they are in the context of getting a home loan for your first home. We’re also going to tackle a few tips that first-time home buyers might find helpful.
What is a house deposit?
Your house deposit is a percentage of the total purchase price of a home you want to buy. You’d have to pay this upfront. Since you’re paying a lump of the house price, the rest will be settled by getting a home loan, and making regular repayments; either weekly, fortnightly or monthly.
So, why do lenders require a deposit in the first place? A deposit is necessary because it acts as a form of security for your loan and is assurance for the lenders that you get a loan with. This is assurance is to ensure that you will continue with your agreement to repay the loan once the deal has been carried out.
How much do I have to pay for my house deposit?
How much you have to pay as a deposit can vary. Typically, it ranges from 5% – 20% of the total house price. The percentage is affected by variables like:
- Mortgage insurance
- Stamp duty
- First-home buyer schemes and grants
You’d also have to think about the value of the house you want to purchase, the lender’s requirements and your financial circumstances. So, it can, therefore, be difficult to specify an exact amount.
As a rule of thumb, first-home buyers can calculate for:
- 5% as a minimum for a house deposit,
- 3% for mortgage insurance, and
- Up to 5% to cover any additional costs (this range will depend on what grants are available).
Tip for first-home buyers: Aim for 20% of your mortgage deposit
A general rule is that the bigger your mortgage deposit is, the less you’d have to repay monthly. If you save up 20%, it’ll be easier for you to make the repayments for your mortgage. Other advantages to this are:
1) No more LMI
You don’t have to pay Lenders Mortgage Insurance (LMI) which is needed for a lender to insure itself against the risk of not recovering the loaned amount if you are unable to make your mortgage repayments.
2) Shows that you’re a good saver
Although the mortgage deposit itself is meant to be a form of security, you’ll get approved for a home loan faster if you have a bigger deposit, This is because it shows that you can manage your finances well, and the lender will feel more inclined to trust you and your ability to repay the loan.
What can I afford to borrow based on my income?
After figuring out what your deposit is, you’d have to see how much you can borrow based on what you’re earning. Typically, it is suggested that first-home buyers should spend no more than 30%-35% of their gross income on mortgage repayments.
However, some factors can impact your borrowing power as lenders will also look at:
- Your net income after tax,
- What expenses you are carrying, such as lifestyle expenses, grocery expenses, and car expenses,
- If you have existing repayment commitments (car loans, credit cards, interest-free deals or HECS/HELP debt), and
- The size of the house deposit.
The items listed are just a few factors that can affect how much you can borrow. In most cases, a lender will be comfortable with loaning you 80% of the total price of your home. If it’s more than 80%, you’re likely going to pay Lenders Mortgage Insurance (LMI). However, it is important to speak with one of our mortgage brokers to understand your home loan serviceability based on your current financial position.
Can I access any first-home buyer grants?
It’s ideal to save as much as you can to reach your property and finance goals, such as paying your house deposit. But each person has different needs. If you’re looking for a lighter option, there’s the First Home Buyer Guarantee (FHBG).
In Australia, the government aids first-home buyers in the form of a First Home Buyer Guarantee (FHBG). The FHBG is designed to help first-time buyers enter the property market sooner by allowing them to purchase a home with a deposit as low as 5% of the purchase price, rather than the standard 20% deposit required by most lenders.
To be eligible, first-home buyers must meet specific criteria, including an income threshold (for an individual or a couple). There are also requirement that the property should be owner-occupied, meaning that you must move into the property for the first 6 months after the loan is settled.
You can learn more about the FHBG on the National Housing and Investment Corporation website, or by contacting Vision.
What’s the next step for a first home buyer?
It can be intimidating to know exactly how much you need to save for your house deposit. Even with the grants in place, you still have to think about your income and how budgeting for your mortgage repayments will affect your lifestyle.
If you need some guidance to make the process of buying a house less daunting, give Vision a call today. We can guide you through the process while taking into consideration your specific needs as a family, couple, or individual.
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