ACCORDING to comparison site RateCity, about 70 per cent of home loans now require a deposit as low as 5 percent of the property’s value. But there are good reasons to build a more substantial deposit.

The amount you can borrow is relative to your home’s value is known as the loan-to-valuation ratio, or LVR.

Traditionally, home buyers have aimed for a deposit of 20 per cent with an LVR of 80 per cent. However, high property values are making it difficult for some buyers, especially first-timers, to acheive that target. In response, LVRs are being relaxed by a wide selection of lenders.

This may open the door for more first-home buyers to get into the property market. In fact, a loan with an LVR of 95 per cent could see you buy a $400,000 home with as little as $20,000 of your own money.

But having a small deposit inevitably means paying a very sold lender’s mortgage insurance (LMI) premium. And that is a significant ptifall.

Lenders will insist you take out LMI if you are borrowing more than 80 per cent of the property’s value.

It is a one-off cost organised by your lender - as a home buyer you don’t need to shop around for it.

The catch is that it is designed to protect the lender, not you the borrower, in the event you cannot keep up the loan repayments.

If a lender faces a forced sale of your home and the proceeds don’t recoup the full amount outstanding, LMI covers them for the difference.

That’s all good for lenders but for home buyers LMI can be a major expense. Let’s say for example, a first-home buyer purchases a $400,000 property with a deposit of $40,000 or an LVR of 90 per cent. In this case the LMI premium will cost a staggering $5040.

You can always add it to your loan though this means paying and extra $40 in monthly repayments.

If the same first-home buyer purchases a $400,000 property eityh a deposit of just $20,000 and LVR of 95 per cent, the LMI premium is about $10,400.

That’s an extra $88 each month if you tack the cost onto your home loan.

When you look at the numbers in this light I reckon it’s reasonably clear that having a small deposit can be a case of false economy.

Remember, too, the smaller your deposit the more susceptible you are to future increases in interest rates or a reduction in your income.

I realise that saving for a firt home isn’t easy. And it can be very tempting to go for a loan with a high LVR, but it’s an option that could leave you financially skewered. Chances are you are better off focusing on building a decent deposit. This will minimise the amount you need to borrow, and maximise your ownership in the place from day one.

SOURCE: Paul Clitheroe

Avoid the downfalls

1. OUR HOUSE SHOULD SELL REALLY EASILY
PRESUMPTION is one of the biggest home seller downfalls. Expecting your home to sell quickly and easily, for a figure you are happy with, is a very common error.
When the market conditions are right this can be the case but this requires the correct alignment of circumstances, being that there are only a few homes like yours for sale combined with high buyer demand. If you can pull this off it makes you lucky indeed.
In my experience however, this perfect market balance tends to only occur around two to three years in every decade, sometimes more in prime areas and occasionally less in more fragile regional markets.

2. WE HAVE SPENT A FORTUNE SO WE SHOULD GET TOP DOLLAR
THE fact you have invested $50,000 for example in the past three years does not mean it is worth $50,000 more than a similar home in your area. It depends on what you spent the money on.
Adding square metres in the form of an extension should guarantee you added value if the new accommodation works well with the existing floor plan. Adding rooms in the wrong place can detract from value. A new kitchen should add value, if the style is popular. Don’t automatically expect it to equate dollar for dollar in assured added value.

3. BUYERS SHOULD BE ABLE TO SEE THE POTENTIAL HERE
YOU need to consider what the market was like at the time you purchased, how did the price compare with other homes at the time of purchase? Also, if you have not modernised any areas over the years, the home may still have the original negatives. Or alternatively, it could still have its original “potential” as you claim, plus more issues with dated fittings. Buyers love potential but potential usually equates to expenditure. The potential equation is this - the purchase price plus cost of realising that potential plus a few dollars for effort must not exceed the fully improved value. Buyers tend to overestimate the costs for improvement so they will negotiate hard.

4. AGENTS DON’T KNOW THIS HOUSE THE WAY WE DO
IT is true that your agent does not know the house like you but to sell a house you need to know a location inside and out. You also need to know the pros and cons of the home and the local housing market. A good agent also has the ability to work with buyers, knowing how and what features to sell to them, being the perceived third party to discuss your home and how it could be improved to meet their specific needs.

5. I AM NOT GOING TO SELL NOW UNLESS WE CAN GET OUR PRICE
BUYERS really don’t care what you need; they will only pay what they think it is worth to them and also compare that price with other homes for sale and sold.
To avoid disappointment research the market yourself and investigate the market value of homes similar to yours. Quite often sellers list on a “testing the market” scenario. This can work but note the longer your home has been on the market the less of a prize it becomes.

SOURCE: Brisbane Sunday Mail, Andrew Winter