Frequently Asked Questions

Your maximum borrowing capacity and the amount you should borrow are often different. Just because a bank or lender is willing to lend you a certain amount, doesn’t mean that amount is right for your individual needs. Determining your maximum borrowing capacity should be carefully assessed by looking at a number of factors including your income and individual spending habits. When looking at borrowing capacity, the two limiting factors are your savings/deposit and your available cashflow.

Example 1 – If Jenny is looking to by a $600,000 home, has no savings/deposit but has sufficient income to make loan repayments, Jenny would be unable to purchase a property as she is unable to pay for the upfront costs (deposit, stamp duty and other purchase costs).

Example 2 – If Jenny has $200,000 saved but has insufficient income, she would be unable to purchase the property. Although Jenny has enough money to pay for the upfront costs, she would be unable to make the ongoing loan repayments. In some instances, a family/equity guarantor can be used in place of genuine savings.

Stamp duty is a tax charged by the state government when purchasing a property (also known as transfer duty). The amount of tax charged can differ depending on a number of factors, including; property value, property location and available grants and/or schemes the state government offer. In NSW, first home buyers have access to the First Home Buyers Assistance Scheme (FHBAS) which provides a stamp duty exemption for first homes valued up to $650,000 and a partial stamp duty exemption for first homes of up to $800,000. To find out more above the ‘First Home Buyers Assistance Scheme (FHBAS)’, check out the latest information on the on the NSW Government Revenue – Grants and Schemes website.

A guarantor home loan allows parents to assist their children in purchasing a home by using the equity in their home or investment property in place of savings. This can assist first home buyers to get into the market sooner as the first home buyer doesn’t have to save the full 20% deposit. When a guarantor uses their equity in place of a deposit, they are essentially putting up a portion of their home as collateral so the lender will accept the loan application. As this is the case, guarantor loans need to be handled with care and all parties need to ensure they fully understand the risks involved.

Guarantor loans can be a great way for young people to buy their first home but it’s important to speak with your mortgage broker and obtain legal advice before applying for a loan.

Lenders Mortgage Insurance (LMI) is a premium charged by the lender when borrowing more than 80% of the property value (having less than a 20% deposit). LMI is not a set dollar amount and will fluctuate depending on the loan balance and the amount of deposit available.

Example – Matt wants to purchase a $700,000 home and has $70,000 saved for a deposit. A lender may accept the 10% deposit but will charge Matt an LMI fee of $15,000 due to the increased risk the lender is taking on. Many lenders capitalise the LMI fee into the loan so in Matt’s case, the total loan amount would be $630,000 + 15,000 LMI fee ($645,000)

LMI increases the loan balance which increases the interest charged by the lender so before taking out a loan with LMI, it’s important to obtain professional advice to ensure LMI is right for your individual needs.

• The piece of mind knowing that your interest rate will not change for the entire fixed term.
• Ability to budget better as there won’t be any surprises when it comes to your repayment amount, you’ll be able to better plan and budget for the money you’ll need (for the fixed term).
  
  

•  You can’t benefit from any variable interest rate reductions if they occur within the fixed term.
•  You won’t be able to create an offset account to help reduce your interest rate.
•  Break costs may be charged on a fixed rate loan when you make additional repayments above a certain amount (depending on the lender), switch to a different product, repay the loan in part or in full before the end of the fixed rate term.

•  If the lender increases the interest rate, your rate will also increase.

The below table provides examples of the deposit required to purchase a property. In most instances, if you’d like to avoid paying Lenders Mortgage Insurance (LMI), you’ll need a deposit of 20% or more of the property value.

You may be able to purchase a home with as little as a 5% deposit with the assistance of LMI.