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]

[Fuzzywuzzy]

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

:yeahthat:

I used to work as a lender for a major bank and it can get very confusing sometimes, if you have any questions feel free to ask away.

Misty has given you some good advice about fees, but the good thing about being a first home buyer in QLD is that you're eligible for the $7,000 first home owners grant and you will not have to pay any stamp duty on a purchase price of $275,000. Only transfer and registration of mortgage fees which is just over $500 and your solicitors fee. It is easier if the bank processes your first home owners grant at the same time as the mortgage and it allows you to receive the funds on the day of settlement, you can use it to reduce your loan amount or for whatever you want really.

Good luck!