Following are some frequently asked questions about home loans and buying property
Your maximum borrowing capacity and the amount you should borrow are often different. Just because a bank or lender is willing to lend you a certain amount, doesn’t mean that amount is right for your individual needs. Determining your maximum borrowing capacity should be carefully assessed by looking at a number of factors including your income and individual spending habits.
When looking at borrowing capacity, the two limiting factors are your savings/deposit and your available cashflow.
Example 1 – If Jenny is looking to by a $600,000 home, has no savings/deposit but has sufficient income to make loan repayments, Jenny would be unable to purchase a property as she is unable to pay for the upfront costs (deposit, stamp duty and other purchase costs).
Example 2 – If Jenny has $200,000 saved but has insufficient income, she would be unable to purchase the property. Although Jenny has enough money to pay for the upfront costs, she would be unable to make the ongoing loan repayments.
In some instances, a family/equity guarantor can be used in place of genuine savings.
To find out more about family/equity guarantors, check out ‘family/equity guarantors’ in our Frequently Asked Questions section.
The below table provides examples of the deposit required to purchase a property. In most instances, if you’d like to avoid paying Lenders Mortgage Insurance (LMI), you’ll need a deposit of 20% or more of the property value.
You may be able to purchase a home with as little as a 5% deposit with the assistance of LMI. To find out more about LMI, check out ‘What is Lenders Mortgage Insurance’ in our Frequently Asked Questions section.
Purchase price of property
Minimum deposit required
Without Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) required
* the above table does not take into consideration additional purchase costs associated with buying a property.
Stamp duty is a tax charged by the state government when purchasing a property (also known as transfer duty). The amount of tax charged can differ depending on a number of factors, including; property value, property location and available grants and/or schemes the state government offer.
In NSW, first home buyers have access to the First Home Buyers Assistance Scheme (FHBAS) which provides a stamp duty exemption for first homes valued up to $650,000 and a partial stamp duty exemption for first homes of up to $800,000.
To find out more above the ‘First Home Buyers Assistance Scheme (FHBAS)’, check out the latest information on the on the NSW Government Revenue - Grants and Schemes website.
A guarantor home loan allows parents to assist their child(ren) in purchasing a home by using the equity in their home or investment property in place of savings. This can assist first home buyers to get into the market sooner as the first home buyer doesn’t have to save the full 20% deposit.
When a guarantor uses their equity in place of a deposit, they are essentially putting up a portion of their home as collateral so the lender we accept the loan application. As this is the case, guarantor loans need to be handled with care and all parties need to ensure they fully understand the risks involved.
Guarantor loans can be a great way for young people to buy their first home but it’s important to speak with your mortgage broker and obtain legal advice before applying for a loan.
Lenders Mortgage Insurance (LMI) is a premium charged by the lender when borrowing more than 80% of the property value (having less than a 20% deposit). LMI is not a set dollar amount and will fluctuate depending on the loan balance and the amount of deposit available.
Example – Matt wants to purchase a $700,000 home and has $70,000 saved for a deposit. A lender may accept the 10% deposit but will charge Matt an LMI fee of $15,000 due to the increased risk the lender is taking on. Many lenders capitalise the LMI fee into the loan so in Matt’s case, the total loan amount would be $630,000 + 15,000 LMI fee ($645,000)
LMI increases the loan balance which increases the interest charged by the lender so before taking out a loan with LMI, it’s important to obtain professional advice to ensure LMI is right for your individual needs.
The Principle & Interest repayments structure means that you’re paying down the loan over the loan term, whereas Interest Only means you’re only paying back the interest to the bank.
If you make P&I repayments, your loan balance will slowly reduce until the loan is fully repaid. If you make Interest Only repayments the loan balance will not reduce until the repayment structure is changed to include principle repayments.
There is no one correct loan repayment structure so it’s important to discuss your options to ensure your loan is tailored to your individual needs.
A fixed rate loan means that the interest rate is fixed for the fixed rate term. Usually, fixed rate loans can be set for between 1 and 5 years. In that time, your monthly repayment will be the same each month until the term comes to an end.
A variable rate loan means that the interest rate can move up or down depending on the market and the lenders decision. This means that your repayments can fluctuate up or down throughout the life of the loan.
There is one right answer when it comes to fixed or variable repayments and determining what’s right for your individual needs will depend on your personal outlook, your financial goals and the financial market.