At Melbourne Finance, we want to make sure all of our clients understand their options. We know there is a lot of jargon surrounding purchasing your first home, and often people just nod along and then Google it later. We don’t want you to do that, so here is a quick guide to some of the most common phrases.
The Initial Deposit
How many times have you heard you need a 20% deposit? With the property market increasing in value, it can be a little off putting trying to set aside funds for this initial deposit. What if we told you that it’s not the case? Would that make you more confident in applying for a mortgage?
Ideally, a 20% initial deposit is more cost effective, however if you don’t have this, don’t give up. Most lenders only require a minimum 5% deposit of the purchase price. The only catch is the money needs to be in your account for at least 3 months as evidence of genuine savings.
If you don’t have the deposit, there are alternative avenues to home ownership including:
Non-refundable gift from your parents
Some buyers are lucky enough to receive a gift from their parents which can be used as a deposit. In this situation the funds do not have to be in your account upon finance application.
Alternatively, if your parents don’t have the funds available to give you, they can also put their home up as security against your purchase. This is a common scenario we see on a regular basis. There are potential risks of doing this so we do advise your parents seek independent legal advice.
Loan to Value Ratio (LVR)
The Loan to Value Ratio (LVR) is basically a ratio that measures the property value against the amount borrowed. For example, if you purchase a home for $500,000 and borrow $450,000 your LVR is 0.90 or 90%.
This implies that you have made an initial deposit of 10% to the value of the property. If the loan to value ratio (LVR) is greater than 0.80 or 80% you will incur lenders mortgage insurance.
Lenders mortgage insurance (LMI)
Lenders mortgage insurance is an insurance premium paid by you on behalf of the bank. The purpose of the insurance is to protect the bank in the event of the worst case scenario. The premium is a one off payment which you can pay out of pocket or add to your loan.
It’s important to remember this insurance premium does not apply if your loan to value ratio is lower than 80%. For example, if Sam bought a home for $500,000 and paid a $50,000 initial deposit, Sam would also pay LMI but if Sam paid a $115,000 initial deposit Sam would not need to pay the lenders mortgage insurance.
Stamp duty and First Home Owners Grant
Stamp duty is a tax levied by the state government on certain purchases. Generally these purchases are larger such as buying land or a new home where you may involve a broker. Stamp duty in Victoria is not applicable for purchases below $600,000.
One of the greatest benefits to buying your first home is if you purchase a brand new home, or are considering constructing your own property, you will be eligible for the first home owners grant. The first home owners grant is $10,000 for people purchasing in metro Melbourne or $20,000 in regional Victoria.
Other things to consider when purchasing your first home
There are so many things to consider when purchasing your first home such as fixed and variable interest rates, location, the size of your home and figuring out your borrowing capacity. Melbourne Finance can offer you advice and brokerage to help you secure your first property sooner.
If you would like to discuss purchasing your first home with an experienced and trusted broker, give us a call on 03 8568 3644.