Thank you + Questions RE: 20% deposit

[rizzle]

Firstly just wanted to say a thank you to the Somersoft community. The abundance of knowledge in this place has been invaluable to me (as a lurker so far). I'm amazed in particular at how many buyer's agents/brokers/industry professionals etc. are willing to give away free insights. Jake I will be using some of your advice in my hunt for a home in Melbourne (http://somersoft.com/forums/showthread.php?t=89173), so thank you.

Onto my questions. I'm within 18 months of wanting to buy my first property (PPOR). I'm really not certain about when I should jump in. Not so much from a market timing point of view but more from a personal finance point of view. That brings me to my two main questions. Firstly; how much merit is there is in having 20% deposit down to begin with? I'm in a position now where I could jump into the market with maybe 90% LVR (roughly, but no higher). Pushing that out to 80% on the kind of places I'm after represents a lot more time sitting on the sidelines (add another year or two). I understand the technicalities of this (paying LMI/more interest etc.) so I'm more interested in peoples personal views.

Secondly; what is the maximum amount of my income that should be budgeted towards the mortgage repayments (as a %)? I know this is probably best answered on a person by person basis, I'm more just interested in whether there is a certain point that it gets ridiculous? For what it's worth I'm single, 25, no dependents, have stable full time white collar employment and I'm reasonably employable.

Thanks in advance,

Rizzle

 

[Rolf Latham]

welcome

working out your middle to long term goals will make the LVR questions obvious

as for what is an ok amount to spend on repayments.........most of that is specific to your icnome and lifestyle


ta
rolf

 

[Aaron_C]

90% is fine as long as you can service the loan. All depends on what the purchase price is.

 

[Colin Rice]

That brings me to my two main questions. Firstly; how much merit is there is in having 20% deposit down to begin with? I'm in a position now where I could jump into the market with maybe 90% LVR (roughly, but no higher). Pushing that out to 80% on the kind of places I'm after represents a lot more time sitting on the sidelines (add another year or two). I understand the technicalities of this (paying LMI/more interest etc.) so I'm more interested in peoples personal views.

Secondly; what is the maximum amount of my income that should be budgeted towards the mortgage repayments (as a %)? I know this is probably best answered on a person by person basis, I'm more just interested in whether there is a certain point that it gets ridiculous? For what it's worth I'm single, 25, no dependents, have stable full time white collar employment and I'm reasonably employable.

Thanks in advance,

Rizzle

20% deposit means no LMI payable, lower loan amount therefore lower repayments. It seems that you are already aware of this. 90% LVR or 10% deposit and buy now could mean that if you purchased and prices rise then you may well be ahead of the game as oposed to waiting 18 months and paying the extra 10% deposit. Likewise if the market in the particular area you are looking in stayed flat or went backwards you would be worse of if you waited 18 months and saved the extra 10%.

If mortgage repayments take up over 30 percent of your income, you will be under what is termed mortgage stress. The 30 percent figure is estimated by the Australian Bankers Association and can be used as a general rule for determining if you are under mortgage stress. It is best to try and keep under the 30 percent mark when applying for a home loan because if interest rates increase, then your level of mortgage stress will also rise. But as stated this is a person by person basis and also subject to serviceability.

Have a chat to a broker in your area. There are some excellent ones on this forum as you have mentioned.

 

[jrc77]

Also consider the long term plans for this property. You said initially it will be your PPOR - however your first PPOR when your 25 could well turn into an investment property when you move on in a few years.

If you are good with your money, for long term flexibility there could be an argument to borrow as much as possible (90% or higher) in an interest only loan with offset account. Make sure you are paying at least as much as the the different between P&I and IO payments would have been into the offset account each month.

Then in future if you did decide to upgrade PPOR and keep the existing place as a IP, then you have the ability to use the money in the offset account and have the loan interest on the full original loan amount as tax deductible.

Regards,

Jason

 

[rizzle]

If mortgage repayments take up over 30 percent of your income, you will be under what is termed mortgage stress.

30% of gross or net income? If net then I would imagine many borrowers in this country would technically fall under mortgage stress?

 

[rizzle]

How many percentage points should I be adding to current institution mortgage rates to determine my serviceability?

 

[rizzle]

Also consider the long term plans for this property. You said initially it will be your PPOR - however your first PPOR when your 25 could well turn into an investment property when you move on in a few years.

If you are good with your money, for long term flexibility there could be an argument to borrow as much as possible (90% or higher) in an interest only loan with offset account. Make sure you are paying at least as much as the the different between P&I and IO payments would have been into the offset account each month.

Then in future if you did decide to upgrade PPOR and keep the existing place as a IP, then you have the ability to use the money in the offset account and have the loan interest on the full original loan amount as tax deductible.

Regards,

Jason

Thanks Jason, will take all these points on board. To provide some more general info to everyone, I'm looking for a home (i.e. somewhere I want to come home to each day) that also has qualities conducive to capital gains (refer to link in my initial post). Looking at 1 to 2 bedrooms, up to $380k. Keeping my eye on suburbs such as Northcote, Fairfield, Thornbury, Box Hill, Yarraville, Seddon, Spotswood, Ascot Vale. Plenty of others on my radar too, but a lot of them are too expensive.

 

[Colin Rice]

30% of gross or net income? If net then I would imagine many borrowers in this country would technically fall under mortgage stress?

The source doesnt specify but I would say its referring to gross. This figure is a guide only and would be relevant to income.

 

[Colin Rice]

How many percentage points should I be adding to current institution mortgage rates to determine my serviceability?

Most bank serviceability calculators have a buffer of 1.5-2%.

Serviceability is determined by income - living costs - debt payments = surplus income.

The amount of surplus income remaining generally determines the max loan amount.

Banks calculators vary (often greatly) so if one lender says no due to serviceability another may say yes. Serviceability issues can magnify as your portfolio increases so important to choose the lenders wisely.