Looking at the first option – saving the 20%. If you are on a wage of $75,000 a year and have a child, it will cost you about $40,000 a year for living costs. After tax and the Medicare levy and your take home pay is approximately $57,610. Meaning that if you are careful you can possibly save $17,000 a year.
If the home that you want to buy is $500,000 today you will need to save $100,000 plus about $5,000 to cover the legal costs if you are a first home buyer – this means that you will spend the next 6 years saving your deposit. If this is your second or third purchase the scenario does change as stamp duty will apply to your purchase. For first home purchasers remember that the cap for full stamp duty exemption in NSW is $650,000, and it reduces as the purchase price goes higher.
But what is going to happen to the value of that property in 6 years? Based on a 3% per annum capital growth your dream home now costs $597,000 – and you now need to save another $20,000 to get to the 20%... and you have been paying rent for those 6 years.
Now let's look at the Lenders Mortgage Insurance option. For this scenario we are assuming that you have already been saving for a year or so and have saved $30,000 - $25,000 for the 5% deposit and $5,000 to cover the legal costs. Stick with us here, as this is going to get a little complicated.
The purchase looks like this:
- Purchase price $500,000
- Less deposit (5%) $475,000
- Plus Lenders Insurance $15,960 (source: Genworth LMI premium estimator)
- Total Loan $490,960
Based on your loan having an interest rate of 4% your repayments over six years would have been $168,762. At the same time if you were renting, and the weekly rent started at $500 per week using the same 3% annual increase your rent over the 6 years would be $168,178 – an almost identical outgoing.
Remember that from the option of saving for 6 years your dream home is now worth $597,000 – so you have saved $81,000 (the growth of $97,000, less your initial insurance cost of about $16,000). PLUS, you have now been repaying your loan for 6 years so on a 30-year loan you only have 24 years to go – this means that those extra 6 years of paying rent has in effect cost you another $168,000.
By paying a lenders mortgage insurance policy of $16,000 you have potentially saved yourself $249,000.
Please remember that this is general in nature and the savings are an illustration only – capital growth, rent and interest rates will vary so you need to look at your personal situation before deciding. There are other options, have a look at our other blog articles to find out more.
For a more detailed illustration of your personal situation simply provide some additional information by emailing or phoning David Seymour on 0418 785 747.
David Seymour is an Authorised Credit Representative No 477331 of Regional Finance Solutions Pty Ltd ABN 71163893945 Australian Credit License 484980.