I work with a lot of prospective purchasers.
And many don’t know how to work out their budget for the property.
Everyone starts with the same question:
How much deposit do I need to buy a home?
The short answer is the higher of either
(a) $10,000 or
(b) 2.2% of the purchase price.
Everything else can be borrowed, provided you meet the lending assessment criteria.
With over 100 lenders available in the country, someone will most likely be willing to lend you the money.
The trade-off is how much they will lend and how much they will charge.
The most important question
The most important question is, in fact, not the deposit you have.
The most important question is: How much can you repay your loan every week or month?
Say you can afford $500 a week towards your home.
This borrows roughly $340k over 30 years at 6.5%
If you double your repayments to $1,000 weekly, your borrowing doubles to roughly $680k over 30 years at 6.5%.
Click here for a free calculator. Scroll down to the “How much can I borrow” section and enter your variables.
Interest rates (as of 29 July 2024) range between 6% and 8% for an owner-occupied home loan, assuming you have a good credit history with no defaults.
Most lenders will offer a 25 to 30-year term. Yes, even if you’re in your 60s, as long as you don’t have other factors stacked against you, such as low deposit, short or unstable employment, little to no savings, little assets, bad credit, etc.
Putting it all together
Once you have calculated your borrowing capacity, add your deposit.
Say you can do $1,000 a week and have a $200k deposit, your total purchase would be the combination of the two – i.e., $680k loan + $200k deposit = $880k total purchase including stamp duty and costs.
Stamp duty and costs can vary in each state. It also depends on whether you qualify for waivers and exemptions. Click here for a free calculator.
Let’s say you’re in VIC and don’t qualify for any incentives or assistance. You would then take roughly 6% away from $880k.
The way you do this on the calculator is by entering:
880,000 ÷ 1.06
The answer you’ll get is $830,000
That is your approximate purchase price.
Cross-check, just in case
This is the quickest way to work your purchase budget backwards. Let’s cross-check in the usual way.
If you bought a property for $830,000, your stamp duty plus other purchase costs would total $880,000, as detailed below.
I’ve also added a contingency of $5,000 for comfort.
Your repayments will be roughly $1,000 a week, as shown below
This is the easiest and most straightforward way to calculate your purchase budget.
Solutions for a lower deposit
To compensate for a lower deposit, you need more income to service a larger loan. In most cases, they will be more expensive, and the loan term will be shorter, too. This means higher weekly or monthly repayments.
Here are some possibilities:
- borrow the rest of the 20% through another lending institution
- borrow the rest of the purchase costs through another lending institution
- borrow the rest of the 20% and purchase costs by offering another property as security (the second property can be owned by family members)
Disclaimers
- This information is provided as general guidance only.
- The figures quoted are indicative and subject to change.
- Individual contracts may vary.
- Based on the information provided, I assume no responsibility for any consequence relating directly or indirectly to any action or inaction you take.
- I cannot guarantee and will not be responsible for any damage or loss related to the accuracy, completeness, or timeliness of the information.
- Approval is not guaranteed and is subject to lender credit assessment criteria.
- Your full financial situation must be considered and reviewed before any offer or acceptance of a loan product.