The lender is taking a risk in lending you money. To help ensure you can pay the loan, the lender looks for evidence of a good savings history. To do this they require the minimum 5% deposit is genuine savings.
There are a few different things that can count as genuine savings:
- Funds that have been saved regularly over a period of three months.
- Funds that have sat in an account for 3 months (these may have originally been non-genuine).
- In some cases the rent that you have paid can counter the need of the Genuine Savings.
If you do not have enough genuine savings then you might consider a guarantor.
Lenders Mortgage Insurance
If you need to borrow more than 80% of the purchase price, the lender considers this a higher risk of not being able to recover its money should the borrow default.
To reduce this risk, the lender takes out insurance to cover themselves. Since you are asking them to take this risk, they kindly send you the bill! This is called Lenders Mortgage Insurance (LMI) and does not cover you in any way. You need your own personal insurance to protect yourself.
The LMI premium is calculated on a sliding scale increasing not only with the percentage that you are borrowing but also the loan amount. You should allow up to 4% of the purchase price.
Having a guarantor will eliminate the need for mortgage insurance as the lender has additional security.
This is not an exhaustive list, but does cover the common costs you will see:
- Stamp Duty (Purchase or Transfer Stamp Duty) is paid to the State Government. In NSW, the exact fees that are to be paid can be found at the Office of State Revenue. It should be noted that there used to be a waiver for this that is no longer in effect.
- Your Solicitor or Conveyancing costs will be between $1,500 and $2,000. This should include the Pest and Building reports, Searches and Enquiries and Professional Fees. It should be noted that not all conveyancers are equal and you get what you pay for. The last thing you need is to be stressed out over saving a couple of hundred dollars. Good questions to ask:
- Will you assist me in completing the First Home Buyer Grant application?
- Will you assist me in signing the Loan Offer and Mortgage Documents
- Do you co-ordinate the return of these documents and any other requirements that the lender has asked for?
- Application Fees are generally around $600-700. Some packages may replace the upfront fee with ongoing fees. There are also application fee waivers from time to time. The catch with application fees can be in the name. The lender may have “No Application Fees” and then charge you a “valuation and settlement fee”. Ask the questions and know what you are getting into before you agree to go with a lender.
- Miscellaneous Fees could fall into several categories such as Building and Contents Insurance, Council Rates, etc.
- Other Government Fees could include Registration Fees, Transfer fees, and sometimes Discharge fees or Search Fees.
- Deposit Bonds are a an “I owe you” that you can use for the deposit. This can be used if you don’t have the deposit now, but will have the money at settlement.
Gifts can be used for the Other Costs. Some lenders will waive the requirement for genuine savings provided the gift is substantial enough.
Gifts need to be supported by Statutory Declarations, even if the funds are already in the account. Gifts can be done in two ways, Repayable or Non Repayable.
Repayable gifts need to have a monthly payment stipulated on them for the lenders to allow for that monthly outgoing figure.
Non Repayable gifts have to explicitly state their nature e.g. “I am giving this Non Repayable Gift of $20,000 to…”
Please see the documents section for Repayable and Non Repayable Statutory Declarations for your completion.
In some cases lenders will allow you to add the LMI premium to the loan amount. This is called capitalising.
As an example, several lenders allow 2% of the LMI premium to be added to the 95% loan. If the premium is more than the lender will allow to be capitalised than you will need to cover any difference from your own funds.
Equity is the difference between what a property is worth and what you owe on it. Consider an example- your property is worth $400,000 and your mortgage is $250,000. You would then have $150,000 (or 37.5%) in equity.
So in the above example without paying LMI you could only borrow $70,000. See below for the working:
|x||80%||80% to avoid LMI|
|=||$320,000||Max mortgage without LMI|
|–||$250,000||Subtract existing mortgage|
|=||$ 70,000||Equity available to borrow|
Equity is an important concept when refinancing and buying another house. It can be used as security to set up the new mortgage.