Should I spend all my savings on a 20% deposit?

Discussion in 'The Buying & Selling Process' started by John Healey, 9th Jan, 2021.

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  1. John Healey

    John Healey Member

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    Hi everyone, I am new to the forum and just wanted to get some advice on the deposit of my first investment property.

    I have the 20% deposit saved up and ready to take out a mortgage however this would be virtually all my savings (I'd be left with a few thousand dollars for monthly expenses etc). Common sense tells me that I should leave myself a buffer of about 3-6 months worth of mortgage payments just in case of any unforeseen events, which means I still have a bit of saving to do.

    I am still young and live with my parents so I don't have many financial obligations at the moment. The only thing I am concerned about is in the unlikely event that I lose my job I may not be able to make my mortgage payments.

    My goal is to purchase a property sooner rather than later, so my question is, would it be better to:

    (1) continue saving up till I have an adequate buffer (approx 3-6 months of monthly mortgage payments). However note that this could set me back by about 6 months

    or

    (2) do less than 20% deposit (perhaps 17-18%), pay the LMI and keep the remaining% as a cash buffer and buy a property now

    Any thoughts and advice are much appreciated, cheers.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Depends on a lot of things such ashow fast you can save, whether the parents can help if you lose your job etc. Would the rent cover the repayments?
     
  3. meffn

    meffn Well-Known Member

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    Look at St George who are offering 85% lvr to first home buyers with no lmi
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    OP is looking to buy an IP

    ta
    rolf
     
  5. meffn

    meffn Well-Known Member

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    I missed that part. :(
    It's not what OP asked but for a first property its worth evaluating carefully whether it should be an IP. There could be advantages in it being PPOR around first home buyer incentives and stamp duty waiver. Conversely if you buy an IP first and PPOR second you wont get access to various incentives.
     
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  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Not enough data............... but typically in such a scenario LMI is a good investment with an 88 % + LM+ lend because

    1. The premium is depreciable over 60 mths
    2. The 8 % held back may prove valuable in opportunity or challenge
    3. You retain 8 % for future non deductible debt deposits or only have to save another 4 % + costs for the next cookie cutter IP

    Im not a tax guy !

    There is typically a rate premium for > 80 to consider too, though many fixed rates have small or no loading


    ta
    rolf
     
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  7. meffn

    meffn Well-Known Member

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    Why 88% specifically? And not 85 or 86 or 87...
     
  8. jaybean

    jaybean Well-Known Member

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    I don’t think it scales linearly. If you look at the cost curve I think it’s the sweet spot.
     
  9. John Healey

    John Healey Member

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    Thanks TerryW - the rental income will probably only cover a bit more than half the loan repayments. Friends and family could potentially help but I'd rather not get them involved.

    After I take out the loan (with 20% deposit) and if circumstances changed for the worse, is it still an option to increase my LVR to above 80% and then incur the additional LMI costs?

    Thanks in advance
     
  10. John Healey

    John Healey Member

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    Thanks for your input Rolf. Sorry I am quite new to all this - you mention that "LMI is a good investment with an 88 % + LM+ lend"

    What is LM and Lend?
     
  11. euro73

    euro73 Well-Known Member Business Member

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    lenders mortgage insurance on a loan with an LVR of 88% is typically @ 2% or thereabouts . So a loan of 88% or thereabouts + LMI of 2% or thereabouts results in a total loan of 90%, which is the max LVR investors can access at overwhelming majority of lenders. That's what @Rolf Latham is referring to
    You mentioned that the rental income from the proposed purchase will only cover approx half the repayments, maybe a bit more . That seems quite remarkable with 20% cash contributed and with rates this low .... and even more so if you have calculated that using IO rather than P&I ... ( not sure though .., have you ? ). If so , it doesn’t bode well for the repayment gap when the loan reverts to P&I or if rates increase in coming years .... if that’s based on P&I out of the gate , still a poor result with 20% cash contributed . are you sure the yield is that weak ? That seems way off
     
    Last edited: 10th Jan, 2021
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  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Can you borrow from parents or use a parental guarantee to avoid the lmi?
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It could be possible but much harder
     
  14. Stoffo

    Stoffo Well-Known Member

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    Do your parents own their own home, or rent ?
    In that if they rent they could move in with you in your "new place", you would be eligible for various govco grants, and mum and dad could kick the tin (assist off the books).

    First IP is always hard if you don't have existing equity in another property as security so you can borrow 110%