Knowing how much money to borrow to secure a property is key to investment, but like many of life’s big decisions, there is not a one-size-fits all answer or solution. There’s also a number of aspects to consider – it is not necessarily as straight forward as it might initially appear.
The first consideration is the size of the deposit. The larger the deposit the better, as it demonstrates to the lender you are financially secure. The deposit also determines the loan-to-value ratio (LVR).The LVR is a percentage calculated by simply comparing the amount of money you have to borrow to the value of the property. If the property is $500,000 and you have a deposit of $100,000, then you will borrow $400,000 or 80%, which in the LVR.
Your deposit will also determineif you need to factor in the cost of Lender’s Mortgage Insurance (LMI). This is an insurance policy designed to protect the lender should financial loss occur if the borrower is unable to afford to keep up with their home loan repayments. LMI may be a condition the financial institution places on you to borrow. While this cost is usually added to a mortgage, it can add thousands to the mortgage – and you will pay interest on this amount. Take a look at the table below, which gives cost estimates on LMI for a number of scenarios*.
|Cost of property||5% deposit||10% deposit||15% deposit|
Source: Quotes taken from YourMortgage LMI calculator, correct as at 10 January 2018.
To avoid Lender Mortgage Insurance, a deposit of at least 20% is needed (so, on a $500,000 property the deposit would need to be at least $100,000).
There are also other costs associated with property purchase; these are sometimes also factored into the total borrowings.
Depending on your financial institution, there will be a number of upfront fees that could be charged at the establishment of your loan. This may depend on whether you are a new or existing customer or whether there are document preparation and valuation fees. Always ask your lender to outline these before signing any documents.
A property is a large asset that you will want to protect; you therefore need to insure it from the time of purchase. Home and contents insurance will be needed if you are planning to live in the property. If the purchase is for an investment and you plan to rent it out, landlord insurance should also be considered.
Death and taxes! Stamp duty is applied by all Australian states and territories when property purchase is made. Cost varies around the country – Queensland is cheapest and South Australia the most expensive but regardless of your location you will need to have the money to cover the cost of the tax as well as a mortgage registration fee and a transfer fee. The last two of these charges are smaller but still need to be factored in. As with other costs they can be added to total borrowings but this will increase mortgage and interest payments.
In Victoria, costs for a $500000 purchase would be:
|Stamp Duty||Mortgage registration fee||Transfer fee||Total|
There are options for DIY conveyancing but this is probably not advised unless you have some legal experience. You can either employ the services of a solicitor or a registered conveyor. This will depend on the type of purchase you are making. A solicitor can give greater legal advice but a conveyancer is likely to be cheaper.
If the purchase is an investment and you want to rent it out, you will need to consider engaging the services of a real estate agent or property management service. If the property is not already tenanted, you will want to do this quickly to ensure you have a tenant as close to settlement as you can. This will mean you will have the rental payments to offset the mortgage cost almost as soon as you start paying them.
* These estimates are based on a 30-year mortgage and are indicative results only. Your financial institution will give exact costs for your specific situation.