Applying for a home loan is a long-term and serious commitment. You’ll borrow hundreds of thousands of dollars, in most cases, and your loan duration will span over 20 to 30 years. You’ll be expected to pay back what you borrow, along with any interest. So, the more you save as a deposit and the less you borrow, the less you’ll repay over the duration of your home loan.
In order to secure a home loan you’ll need to prove to your prospective lender that you’re a good risk. You’ll need to have a strong employment and credit history, have minimal liabilities and a genuine saving’s history.
Your home loan deposit can save you thousands. The amount of money that you save as a deposit will reduce your overall loan amount, reduce your monthly repayments and save you thousands in interest repayments and lenders mortgage insurance (LMI), if you borrow more than 80 percent of your home’s value. Let’s look at an example.
Let’s say you can afford to borrow $400,000. This means that your monthly repayments at 5.25 percent over 25-years is $2,396.99. Over the 25-year term you’ll pay $319,099.26 in interest. If you save a 10 percent deposit of $40,000, this will reduce your initial borrowing amount to $360,000. You’ll then pay $2,157.29 in repayments per month and $217,189.53 over the 25-year term.
However, saving only a 10 percent deposit can be costly. As most lenders will ask that you pay LMI, which can add thousands to your loan value. The only way you can avoid paying LMI is to save a 20 percent deposit for your home loan. Sure this may take longer, but you’ll save yourself a great deal in the long run.
If you save 20 percent of $400,000, then you’ll need $80,000. This then reduces your borrowing amount to $320,000. You’ll now be paying $1,917.59 a month and paying back $255,277.81 in interest. Plus, you’ll no longer need to pay LMI. In addition to this, you’ll typically find that other home loan costs, such as mortgage title transfers, will be less.
Saving for longer not only reduces your costs long-term, but it also gives you more time to research the property market. This will allow you to find the right property, at the right price.
If you want to buy sooner, then look at reducing your borrowing amount so you need to save less as a deposit. Also consider ways that you can save more. Sell unwanted items. Open a term deposit account that gives you higher interest. Cut down on luxury items and put the money you save into your account.
Do you want to know more about saving a home deposit? Then don’t wait a minute longer, contact eChoice TODAY.
Written by eChoice