Property investors often borrow the funds needed to finance their investments usually through a mortgage. A mortgage is a loan which is secured by a home or other real estate property in case the buyer or borrower fails to repay the amount owed to the lender. The buyer, however, must still produce some cash as down payment for the mortgage. A common question often asked is "How much deposit do I need for a mortgage?" The amount will depend on the value of the property, the loan term and other factors.
Property value
How much do I need for a mortgage will depend on the property's value. Lenders will ordinarily allow an investor to borrow up to 80% of the value of a property. This means that the buyer must raise at least 20% as down payment for the mortgage.
Loan term
Mortgages with longer payment terms may require low down payments but this does not necessarily translate into lower costs for the borrower. Long payment terms often carry higher interest rates which the borrower pays in monthly installments of lower amounts. It is possible to reduce interest costs by increasing the down payment.
Loan mortgage insurance
The lender's risk can affect the loan able amount or conversely, the down payment of the mortgage. A lender may reduce the down payment of a mortgage by requiring the borrower to obtain lenders mortgage insurance (LMI). LMI insures the lender against default by the borrower who pays the premium. LMI is an additional cost that can increase the overall costs of acquiring property.
Home equity
Buyers with limited funds may still obtain a mortgage without producing cash as down payment through an existing property's equity. Equity refers to a property's net value after deducting any unpaid mortgage due upon it. Instead of paying in cash, the borrower may use his home's equity as down payment for a mortgage.
A buyer who has the answer to the burning question "how much do I need for a mortgage?" may also have to decide whether to defer the purchase and save up for the deposit or to acquire property by purchasing LMI. As a rule of thumb, saving up for the deposit is appropriate when the savings rate can catch up with the rate of capital growth. Another option is to weigh the expected capital growth against the amount of the LMI premium. If the capital growth is expected to exceed the cost of the LMI, purchasing the property immediately may be a sound investment. It is best to consult a mortgage broker who can assess the type of financing you will need and the corresponding deposit amount for it.
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