Buying
Investor
Tips for Buying a Home
17-May-2021
In this current environment when housing prices have been going through the roof, first home buyers have been finding it increasingly harder to get into the market and purchase their first home. The reason for this is because banks ideally want to see a 20% deposit to purchase. On a property worth $800,000, that’s $160,000 in savings.
There’s a lot of talk in the market stating that banks only need to see a 5% deposit from purchasers to buy their own home however whilst this is true, it doesn’t necessarily work that way. Banks will only go to a maximum of 95% lend (so yes, the 5% deposit is true), however the reality is when you don’t have a 20% deposit, the bank will charge you LMI (Lender’s Mortgage Insurance). This is a compulsory insurance charged by the bank but paid by you as the borrower. The worst thing about this is LMI doesn’t protect the borrower at all, only the bank! The way this protects the bank is because if a borrower were to purchase at $800,000 for example, assuming a 95% lend, this would mean the loan amount would be $760,000. If the borrower were to default and not be able to afford the repayments, the bank would have the right to sell the borrowers property for them to recoup their money. If the bank were to sell the property and the market were to go backwards and only sell the property for say $750,000, the bank would be out of pocket $10,000 plus selling and legal fees. LMI protects the bank so the lender is not out of pocket in the above scenario.
Question : In reality, how much of a deposit does a borrower need to purchase?
Ideally a borrower would need to have close to 15% of the value of the property they are looking to buy, as a deposit to purchase. Why?
-Because the bank will only lend to a maximum of 95% and charge you LMI for any lending above 80%. If you provide a 10% deposit, the LMI premium will be approximately 1.80% - 2.50% of the value of the property. If you provide less of a deposit, such as 8-9% (meaning 91-92% lend) then the LMI premiums become a lot more steeper and can be approximately 3% of the value of the property which takes you right up to 95% lend (which lenders become uncomfortable lending right up to their maximum amount). So essentially you want to have 10% to cover the deposit for the bank and to stay under 95% lend.
-The other 5% is needed to cover other costs to purchasing such as stamp duty, legal and moving fees. Please note that there are stamp duty concessions to first home buyers which may reduce this cost but it’s best to speak to your solicitor or conveyancer to understand what grants and schemes are available to you.
Question: What are common ways parents can and have helped their children purchase property?
1.By providing an unconditional and non-repayable gift to their child to help form their deposit to purchase. Generally, a bank will want to see at least 5% ‘Genuine Savings’ from the borrower- this is essentially having evidence of 6 months savings history from the borrower. The gift from the parents does not form part of this genuine savings but the gift can be used to avoid or reduce LMI. The gift cannot be a loan from the parents to their child. If it is a loan where the child will need to repay it to their parents, the banks will commonly use the higher of a pre-arranged repayment schedule between the parent and child or the loan amount over a 30 year period at the banks ‘assessment rate’ which currently sits between 5-5.5%. If included as a loan this may impact the borrowers ability to ‘service’ the loan or impact on the borrower’s assessed ability to repay the bank and parents, hence if the gift is non-repayable and unconditional, the borrower only needs to show they can make the repayments on the bank’s loan.
From what we have seen, parents who provide gifts have been able to do so by using their existing savings or some have been able to extract equity out of their existing property to help fund this gift.
Banks quite often will want to see a statutory declaration from the parents stating that they are providing an unconditional, non-repayable gift to their child to help with the purchase of their new home.
2.A parental guarantee or guarantor loan. The best way to explain this (but it does vary between banks) is that the borrower/s would borrow 80% of the value of the property in their name (as an example $640,000 loan for a purchase of $800,000). The second loan, in this example would be for $200,000 – being 20% of the loan plus another 5% for stamp duty and legal fees (not all lenders that do guarantor loans will go to 105% lend- some will only do 100% and want to see 5% savings contribution from the borrowers). The $200,000 loan would be in the borrower’s name with the parent/s as guarantors.
The guarantors would be using their home or investment property as security for their child’s purchase. The main implication of this for the guarantors are that if the borrower’s were to default on the loan and the bank sold their property and didn’t recoup their money from the funds lent to the borrower, then the bank could seek the rest of the money from the parents. If the parents cannot pay the outstanding balance, then the bank has the right to sell the parents security property to recoup their outstanding funds.
To discuss these options further or see the best way you can get into the property market, please call Lionel Singh on 0413 473 930.
There’s a lot of talk in the market stating that banks only need to see a 5% deposit from purchasers to buy their own home however whilst this is true, it doesn’t necessarily work that way. Banks will only go to a maximum of 95% lend (so yes, the 5% deposit is true), however the reality is when you don’t have a 20% deposit, the bank will charge you LMI (Lender’s Mortgage Insurance). This is a compulsory insurance charged by the bank but paid by you as the borrower. The worst thing about this is LMI doesn’t protect the borrower at all, only the bank! The way this protects the bank is because if a borrower were to purchase at $800,000 for example, assuming a 95% lend, this would mean the loan amount would be $760,000. If the borrower were to default and not be able to afford the repayments, the bank would have the right to sell the borrowers property for them to recoup their money. If the bank were to sell the property and the market were to go backwards and only sell the property for say $750,000, the bank would be out of pocket $10,000 plus selling and legal fees. LMI protects the bank so the lender is not out of pocket in the above scenario.
Question : In reality, how much of a deposit does a borrower need to purchase?
Ideally a borrower would need to have close to 15% of the value of the property they are looking to buy, as a deposit to purchase. Why?
-Because the bank will only lend to a maximum of 95% and charge you LMI for any lending above 80%. If you provide a 10% deposit, the LMI premium will be approximately 1.80% - 2.50% of the value of the property. If you provide less of a deposit, such as 8-9% (meaning 91-92% lend) then the LMI premiums become a lot more steeper and can be approximately 3% of the value of the property which takes you right up to 95% lend (which lenders become uncomfortable lending right up to their maximum amount). So essentially you want to have 10% to cover the deposit for the bank and to stay under 95% lend.
-The other 5% is needed to cover other costs to purchasing such as stamp duty, legal and moving fees. Please note that there are stamp duty concessions to first home buyers which may reduce this cost but it’s best to speak to your solicitor or conveyancer to understand what grants and schemes are available to you.
Question: What are common ways parents can and have helped their children purchase property?
1.By providing an unconditional and non-repayable gift to their child to help form their deposit to purchase. Generally, a bank will want to see at least 5% ‘Genuine Savings’ from the borrower- this is essentially having evidence of 6 months savings history from the borrower. The gift from the parents does not form part of this genuine savings but the gift can be used to avoid or reduce LMI. The gift cannot be a loan from the parents to their child. If it is a loan where the child will need to repay it to their parents, the banks will commonly use the higher of a pre-arranged repayment schedule between the parent and child or the loan amount over a 30 year period at the banks ‘assessment rate’ which currently sits between 5-5.5%. If included as a loan this may impact the borrowers ability to ‘service’ the loan or impact on the borrower’s assessed ability to repay the bank and parents, hence if the gift is non-repayable and unconditional, the borrower only needs to show they can make the repayments on the bank’s loan.
From what we have seen, parents who provide gifts have been able to do so by using their existing savings or some have been able to extract equity out of their existing property to help fund this gift.
Banks quite often will want to see a statutory declaration from the parents stating that they are providing an unconditional, non-repayable gift to their child to help with the purchase of their new home.
2.A parental guarantee or guarantor loan. The best way to explain this (but it does vary between banks) is that the borrower/s would borrow 80% of the value of the property in their name (as an example $640,000 loan for a purchase of $800,000). The second loan, in this example would be for $200,000 – being 20% of the loan plus another 5% for stamp duty and legal fees (not all lenders that do guarantor loans will go to 105% lend- some will only do 100% and want to see 5% savings contribution from the borrowers). The $200,000 loan would be in the borrower’s name with the parent/s as guarantors.
The guarantors would be using their home or investment property as security for their child’s purchase. The main implication of this for the guarantors are that if the borrower’s were to default on the loan and the bank sold their property and didn’t recoup their money from the funds lent to the borrower, then the bank could seek the rest of the money from the parents. If the parents cannot pay the outstanding balance, then the bank has the right to sell the parents security property to recoup their outstanding funds.
To discuss these options further or see the best way you can get into the property market, please call Lionel Singh on 0413 473 930.