A crucial step in home buying is the process of making the deposit. Purchasing for the first time might seem a little confusing so for those considering it, this article gives insight into the steps involved.
How Much Deposit do You Need?
Home loan deposits serve as proof that you are capable of repaying the home loan. As a rule of thumb, if you want to purchase your home, you need a down payment which is 20 percent of the buying price.
Under certain circumstances, some lenders will be willing to give out loans for a smaller deposit (say 10% or even 5% of the buying price) but you would have to include the cost of lenders mortgage insurance (LMI) in your calculations. LMI protects the lender in case you are not consistent with your mortgage repayments, and you will have to take out a cover if your deposit is less than 20% (i.e. you borrow more than 80% of the purchase price).
At the end of the day, your loan-to-value ratio (LVR) will always be directly proportional to your LMI premiums.
It is also possible to take out a low doc plan. This plan is simply designed for the self-employed who might find it difficult to provide an income statement during the loan application process. The low doc plan gives a lower maximum LVR. You may be asked to provide a deposit of about 20% or 40% of the buying price and take out the LMI depending on the lender.
Finally, if your reason for borrowing money is to purchase an investment property, then 5% or 10% deposit is reasonable enough. Find out from your lender exactly how much you are required to pay on the deposit.
Calculate How Much Deposit You Need
To calculate how much deposit you are required to pay, multiply the purchase price by the percentage the lender is asking and divide the result by 100. This way, you’ll be able to calculate how much is required by the lender.
Deposits for Your Home
Everyone would agree that buying a house is a very big investment, perhaps the investment of a lifetime. If you are purchasing a property for the first time, it is important to know your entitlements as a buyer. Despite the fact that you might not be handling the transaction process directly, it is still wise to have an understanding of the process rather than to be clueless as this could save you a lot of trouble and money.
There are two ways to purchase a house. Either via a private settlement or through an auction. When buying through a private settlement, the process consists in you visiting a house you like, making an offer and giving a small deposit. The deposit does not guarantee that you have bought the house, it only shows that you are serious about buying the property. If your offer is accepted, you draw up a contract and sign. It is at this stage, you would be required to make a larger deposit for the property you just bought. After this, you and the seller would then agree on a final settlement that works best for the both of you.
If the house is bought at an action, the process is quite different from purchasing through a private settlement. If you are the winning bidder for the property, you would be required to provide the deposit for the home and you would also sign the contract immediately.
It is important to note that the rules vary depending on factors such as the state where you live in and how the house is sold.
What About Insurance?
Once your home deposit is finalised, the next step is to take on an insurance. There are two types of insurance that comes to mind when you are dealing with property. They are mortgage insurance and home insurance:
The lender is likely to request a mortgage insurance especially if you are depositing less than 20% of the purchase price. This guarantees the lender your mortgage will be taken care of even if you are incapable of paying it off. Also, if you borrowed more than 80% of the purchase price, how much premium you get to pay is not your decision to make.
There are two challenges you experience when it comes to home insurance. Will you get insurance after you exchange contracts and will you draw up your own home insurance? You have to find out from your solicitor before you make any decision so as to avoid any kind of problems in the future.
When to Get Home Insurance?
Most of the time, insurance is drawn after the settlement is done. However, in some cases, the loan company might ask for mortgage documents to be drawn up after the exchange of contracts.
Also Read: 5 Types of Home Loans You Need to Know
Should You Draw Up Your own Insurance?
It is likely, the seller will tell you of a pre-existing insurance policy that covers the property and all that is required of you is to keep it up. This might be a sign it is a good offer as it would save you the time involved in getting a new policy drawn out, but it is still advisable to get your own insurance. This is because you have no idea what the old policy covers and to what extent. It is better to draw up a new policy than later suffer because of ignorance.
Finally, buying a house is a rather long and complicated process, but with the assistance of an efficient and reliable solicitor, you will be able to get your dream home without any issues.
Biljana is Digital Marketing Manager for BestFind. Best Find is an Australian comparison website for personal and business financial products. We make it our mission and goal to provide the simple, comprehensive and transparent data for financial products from many of Australia’s financial institutions.