Confused again - borrowing power and deposits

[Indadhanu]

Ok, so say our borrowing power is $250,000. And we have a $25,000 deposit.

Without factoring in fee's and stamp duty and all that other stuff, does that mean we can put an offer in on a house for $275,000?

Or does the $25,000 go to reduce the $250,000 loan to a $225,000 loan, and we can only afford a $250,000 house?

Have I mention how confusing this all is!

[Maruschke]

You can look for a 275k house and have an eventual mortgage of 250k... or look for a 300k house and bargain like mad .

[Mum2SweetCs]

hmmm not too sure but i think if you wanted to avoid mortgage insurance (forgot what it was called!) then dont you need 10% of the loan? meaning a $250k loan?

Hope someone else will help out lol sorry but hoping you get your dream home soon!

[Epacris]

I don’t know anything about borrowing power but do you know about mortgage lenders insurance. If you have less than a 20% deposit (or if you are borrowing more than 80% of what the home is worth), your bank (or whatever) requires you to pay for mortgage lenders insurance. It not insurance for you, it’s insurance for them – if you default on your loan they are insured. But get this, they will lend you the money to buy the insurance so then you need to borrow more money and then you need to buy more insurance, so it does this crazy compounding thing.

ETA: M2OSB, I'm pretty sure you need a 20% deposit to avoid mortgage lenders insurance.

[OceanPrincess]

The 25k comes off the price of the house... you should look at it this way... your borrowing power factors in your deposit, the bank are only loaning you 225k. So the mortgage total is 225k, plus your 25k, so you can put in an offer of 250k.

Wait that's not very understandable... let me see if I can explain a bit better... I'm not a financal person even though I work for a bank lol... I work in IT...

So you go to the bank, you say "We want to buy a house, how much can we borrow?" then they will ask how much of a deposit you have saved up. That factors into their calculations and then you get "pre-approval" for a purchase price of whatever. Working on your figures, you say you have 25K, the bank says "Ok, you are pre-approved for a 250k purchase".

So they have done all their calculations based on your income etc and on your deposit and given you pre-approval for a particular amount. So you can buy a house up to 250k.

Depending on how you buy, you generally need to leave a 10% deposit with the vendor when you put an offer in and it is accepted. Then when you settle on the house (when the sale goes through and you get the keys and the bulk of the money is exchanged), you pay the rest of the amount owing and end up with a 225k (or a bit more with stamp duty etc) mortgage.

Does that make sense?

I've just bought a second house... we have decided to keep the first, but we had to refinance our existing mortgage, access the equity in this house to use as a deposit for the second house... my head was spinning!

This is why we got a mortgage broker! They do it all for you

[OceanPrincess]

The PPs are correct, if you want to avoid LMI (Lender's Mortgage Insurance) you must have a deposit of 20%... but when DH and I bought our first house we only had a 10% deposit and I think we paid 7k or something in LMI... it was a bit, but not a huge amount in the scheme of the whole loan.

[Mum2SweetCs]

oh 20% lol thank goodness for more knowledgable BB'ers! LOL

[Indadhanu]

LOL this is theoretical, not real numbers I know how much deposit you need and LMI on an LVR of over 80%, I just couldn't remember if the deposit adds to the buying price or takes away from the mortgage loan amount, so I made the numbers up to be easy lol

LOL which is it?

your borrowing power factors in your deposit

or

You can look for a 275k house and have an eventual mortgage of 250k...

[Maruschke]

We are currently buying a house in Caboolture. I know because only one of us is working (me) our borrowing power is about 220k, but we have a 170k deposit so we are bidding on a 340k house, giving us an eventual mortgage of 160k. Your borrowing power is the maximum amount of money you can owe at the end of the day and have to start repaying... it doesn't matter what the deposit is.

HTH
M

[Indadhanu]

Oh cool thanks hun. We are buying in Caboolture too

So if I was approved to borrow $250,000, and if I brought $25,000 deposit to the table to add to my prospective buying price, I could afford to put an offer in on a house for $275,000.


Of course, if I wanted to be technical I'd be bringing $50,000 to the table to factor in LMI But then I'd be bringing a lot more to cover fee's stamp duty and all that other sticky stuff.....

[misty]

Just keep in mind you will need extra (approx 5%) of the purchase price on TOP of your your deposit for other buying expenses (ie, stamp duty, LMI, solicitor fees, rates adjustments, etc). So if the banks are saying you can borrow $250k, and you had 25k deposit, you would also need extra about $12,500 for those incidental purchasing costs. [It may not be quite 5% - as you may be able to take advantage of concessions on stamp duty etc; but it is generally a good budget guide]

[Maruschke]

If it helps, you can find heaps of calculators that cover stamp duty , mortgage set up fees, conveyancing fees etc (basically all house buying cost fees). I think I used the NAB one today.

[Maruschke]

Here it is: <link removed>

[Indadhanu]

LOL yep, thanks misty, not thinking about that stuff just now, was just trying to working out if a deposit added on to the amount you could buy or if it reduced the mortgage.

Oh I know where that is. Nice area all very new and sparkley in there!

[Maruschke]

Actually I grew up on that street . Where abouts would you think of buying? There are some parts of Morayfield / Caboolture that are kinda cheap and I wonder if the areas will pick up over time or just get worse?

[Violet Star]

It depends on who you go through as well. I know in the past I was really put off by morgage insurance by some banks, and then when another bank spoke through some options, it didnt actually cost that much to have the MI in the first place. So it really does pay to speak to a few people or even a REALLY good broker. I know people who have been heartbroken over dream houses, when with paying only a little MI, they would have been able to borrow the small amount to get the home.

Hope you find your dream home soon

[Indadhanu]

Have you been there in a while? Everything is so built up, so many new houses being built, only a few older houses on the side streets are still there.

There are some areas that are very cheap, but Cab Sth is NOT somewhere I would raise children so we have to look a bit more expensive. Then general rule of Cab is - when the house prices go above $260,000, the area is generally alright

I'm thinking Lower Morayfield/Upper Caboolture. Bellmere. Some parts of Tullawong. Even the outer subrubs like Moodlu, Elimbah, and Ningi.

[Maruschke]

Have you been there in a while? Everything is so built up, so many new houses being built, only a few older houses on the side streets are still there.

There are some areas that are very cheap, but Cab Sth is NOT somewhere I would raise children so we have to look a bit more expensive. Then general rule of Cab is - when the house prices go above $260,000, the area is generally alright

I'm thinking Lower Morayfield/Upper Caboolture. Bellmere. Some parts of Tullawong. Even the outer subrubs like Moodlu, Elimbah, and Ningi.

Upper Cab, tullawong area, Elimbah, Bellmere were all areas we looked at. Moodlu is really pretty!

Cab South is definitely a no no, I don't feel safe out there.

Have fun hunting we have a great Real Estate agent out there so when you get closer to buying I will pass his details on (and the details of someone you NEVER EVER want to have to speak to, EVER). *shudders*