Are you better off saving a big deposit or diving right into a mortgage?

We live overseas. We don't pay rent here and are managing to save reasonably quickly. We don't own a house in Aus, but want to invest in one. Given that there is no hurry i am really torn as to what is the best option. I hear that the market is slowing but the areas we are looking in have gone up about 80K in the past 12 months. I am no real estate guru, in fact i have been known to listen to what Kochie says, which shows just how little i know!

So do we buy now and then hopefully benefit from the increase in valuation of the property?
Or do we save a big deposit and look in another 12 months so we have to borrow less?

i dont know what is best to do but we are saving as much as we can and going the bigger deposit option that way if anything were to happen we wouldnt be stuck with HUGE repayments but ones we could manage still

where abouts are you looking? the market is becoming a lot softer at the moment so prices will fall... (though always depends on the area). if you take some types of mortgage that you can pay direct into any amount you can kinda have it both ways - keep on putting lots away which is paying it off/reducing interest but you can draw on the money...(i can send you details of some of them - things like rocket repay). have you owned before? (first homeowners grant issues) and will you ever live in it?
Also - think thru what you will be able to afford when you do come home mortgage wise...

I would wait, we've been going back and forth with the same thing.

There are huge benefits to a larger deposit. You pay less interest on your property in the long run, there's more room to move if your circumstances where to change or rates went up, you might not have to pay lenders mortgage insurance and so on.

I'm also inclined to believe prices are going to fall or at least stagnate of the next couple of years. We live in a popular suburb and there's been houses on the market for over 12months.

I'd be inclined to save. but this is the perspective of a buyer occupier. MP has made some great points about the redraw possibilities, but then again if you have to pay mortgage insurance it's an extra cost over the life of the loan IYKWIM.

Thanks ladies.

MP- We are pretty flexible. But the two main focus areas are Williamston/Newport and the Frankston area. The first because i love the area and it is somewhere we could possibly live in the future. The second because the prices are good and the rental returns on investment are pretty good there. But i don't think we'd ever live there. We have never owned so yes we'd be eligible for the first home owners. I was surprised that prices had gone up in both areas, as they are so different....
When we come back, i'll be going back to work, so we'd have two wages again making mortgage repayments much easier. But yes we do need to think about that. Good point! I'd love any info you have MP. The reality is that we probably would never live in it unless something drastic changed. DH is a farm manager and we will probably live out of town, even if i am working in the city. Another option would be to look down Geelong way as i can always get work down there. The main problem with our marriage is our working lives. DH needs to be in the country and i need to be near a fairly major city. :doh: But we'll work it out. I'd be interested any any info you had.

TMS- I keep thinking that prices will slow or fall, and people say it will happen, but it just doesn't seem to?!

They;re not going to fall IMHO. They might stay steady, but they won't fall. Unless we have a major recession.

My place has gone up 25% in the 18months that I've had it. Scary.

Personally, I'd go WIlliamstown - you'll get much better capital growth and if it's a place you'd like to live, well that's a bonus. Also much easier to get to Geelong!

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I am no real estate guru, in fact i have been known to listen to what Kochie says, which shows just how little i know!

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:rofl: sorry i just had to laught at that, that's hilarious!!

to be honest, me and DH are no where near getting a mortgage, but i know if it were me, personally, i would be saving as much as i can. i have heard a lot of bad things about 100% loans, so i think the more you can save the better.....but i also understand you wanting to get in me market as quick as you can. anyway you could save for a year or 6 months or whatever, you said you weren't in a hurry.....that's what i would do.....

I am not eligable for the first home owners grant so I am little out of the loop however it is my understanding that you cannot use the first home buyers on an investment property, you have to live in the house for at least the first 6 months... just something to look at.

Oh yeah D, i remember that clause too now that you mention it......

Div- I think we are leaning towards there too. 25%?! That's awesome. Who says the market is slowing?!

Anyone got a crystal ball?

Here's the numbers:

Frankston: last quarter growth 1.4%, last 12 months 18.7%, last 5 years 50.8% (gross rental yield 4.2%)
Williamstown: last quarter growth -5.4%, last 12 months 8.2%, last 5 years 41.5% (gross rental yield 3.1%)
Newport: last quarter growth 3.9%, last 12 months 21.8%, last 5 years 68.4% (gross rental yield 3.3%)

FYI, 5% is considered a good rental yield.

Sooooooo, based on that, property prices are slowing EXCEPT in those areas that have traditionally been undervalued (ie. inner west springs to mind) so I would wait, save a deposit and see what next quarter brings.

Have you considered Woodend???????? 83% capital growth in the last five years, in the country and an hour to Bendigo or Melbourne CBD. Not that I'm biased or anything :)

I'd say save as much as you can. If you can save the 20% deposit, you dont pay mortgage insurance. You're also seen as a better risk for the banks than the 95% loans. So many people who've taken out those kind of loans get into repayment trouble.

Have a look at things like the barefoot investor, money magazine etc. I can recommend a financial advisor if you'd like to talk to one.

Assuming prices will go up or down is speculating/ gambling. I'd look at finding investment property that will produce a positive income. If you're not going to live in it, I'd look at rental returns in rural centres and compare to Melbourne. I'm pretty sure you can get a better return outside of Melb.

ummmm excuse me darl but you are NOT allowed to buy over that side of town... Ginger and i will not allow it

JM - you do have to live in the property for a period if you get First HOme owners grant - it isnt the first 6 months but it is something like 6 months of the first year or something like that... so you wont get that... if you have over 20% deposit you wont have to do mortg insurance...

The theory of having as big a deposit is a good one. However for us, it was just a theory. With our first house, we borrowed everything but the kitchen sink to make it work. It was the only way we could break into the housing market as owners.

However for our second mortgage it was much easier. We were able to use the first property as security to borrow much, much less for the second place.

Now that we are about to get our third mortgage, we have a heap of cash in the bank (we sold both properties) which will be our large deposit.

Given your situation, I'd be looking at towns along the Bendigo v-line train route. Woodend, Castlemaine etc have heaps of commuters to the city and are beautiful places. Good rental returns but also lovely, lovely places to live.

We went 100% finance to get our house, the only way we could. Yes, our mortgage repayments are higher than normal, but that's for short term (and was a bit longer because we fixed them for five years). We're looking at refinancing early next year and are anticipating that our repayments will drop by around $100 per week. But by doing it when we did, we bought our house and land package for $249,000 in 2006. House and land packages (off the plan) are now selling around here for $350,000 and our house has been valued (without being seen) at around $380,000. So yeah, no regrets from us. I'd jump in as soon as you can to get the most return.

i would wait. keep saving. the bigger your deposit, the better.....but...that only works if you are good savers. if you are going to waste the money then you are better off buying now and paying a mortgage off iykwim?

Frankston has great rental returns. i think you would be much happier out east though ;)

I'm going to buck the trend here... We only had a 10% deposit and we bought a place that 18mths later was valued at something like 35% more than we paid. So we were able to utilize that equity and buy a bigger house, which we so desperately needed.

There's no way we could have saved that much in 18mths. We are so much better off doing what we did.

The decision is completely dependent on whether you want a home or an investment property. A home is an emotional decision. An investment property is a business decision - you need to look at tax, structuring etc to make sure you maximise your return.

IMHO - Don't bother trying to 'time the market'. And DON"T listen to anything 'Koche' has to say on the issue of property! :lol:

I am making an assumption you are looking at buying purely as an owner occupier, and have no interest in property as an investment. I would suggest that while you are in a position to save to do so. A bigger deposit is going to help. LMI is a large expense, there is nothing wrong with paying this expense if you have too, or if it makes sense financially (ie, from an investment perspective), but if you can avoid it, you will literally be saving yourself Thousands of $$$$$. Not to mention the hassle of dealing with the LMI companies, and living in fear until complete approval by them is granted that they will insure you, whilst jumping through endless hoops and rediculous requests for paperwork they should alrady have (can you tell, I've deal with them on a couple of occaisions?? :D ).

A 20% deposit + approx another 5% for purchasing costs, is the best position to be in. It gives you alot more flexibility in terms of choosing loan products and intitutions, as well as with negotiating discounts or getting a property that comes slightly under value to what you might have predicted or hoped. It also means that you can either get a slightly more expensive place then otherwise (ie, max out your servicibility) or have less debt to the bank and thus lesser repayments.

Of course if you happen across something fabulous while you are still saving that larger deposit, you can always change your mind. :)

Sorry disregard my last post, I just went back and reread your first one and realised that you are actually looking for an investment!!! :rofl:

In which case my answer changes dramatically and I would say it depends on the actual numbers of the property you are looking to buy and your taxable income here in Australia.

Also IMHO disregard all this talk about bubbles etc here in aust. Some places are stagnating, some have had 'slight' decreases, but as a whole most places seem to be going though the regular cycles that property goes through (ie, rapid growth followed by stagnatation or slight decrease, followed by further growth). Property is a LONG term investment, and it truely isn't timing the market that is as important as time IN the market.

I would say the big deposit is better. You will save a fortune on interest over the years.

I would say bigger deposit and buy out west!!!!!!!!!!!!!! Willy and newport are gorgeous!!

Bendigo, Ballarat, Gisbourne, Sunbury etc could be worth a look as your DH could work and you could easily comutte.

Thanks for all your input. I think the money is burning a hole in DH's pocket and he wants to get it invested. And if i don't invest it he'll keep buying more cows! We have a whole freaking herd building up, which is fantastic as it is our school fee fund for the kids, but i'd like to invest in something else as well.
Given there is no rush i spoke to him about perhaps putting the money into a high interest account while we save at least 20% and then have a good lump sum to buy something without paying the mortgage insurance. Maybe we should see a financial advisor? (love a recommendation Tash.....)

Ginger- Oh you know me all too well. :lol: What i have to curb my country road habit??? :redface: We talked about it and are going to 'pretend' we have a mortgage and transfer that money each month from here to an account in Aus. That way it can't really be spent. Moving here has been amazing for our savings, i couldn't spend money if i tried. It has made me realise how little we actually need.

Feeb- Dh manages about 20,000 head of cattle, a big cropping operation, a feedlot and abattoirs with the help of 100+ staff. It is a huge business and there is nothing like that really anywhere in Vic. So not sure what the next step for him would be. If we did live in Vic, he could possibly move into more of a consulting role which would mean we wouldn't have to necessarily be rural. But he does get the shakes when we are close to high rise buildings. :lol: You can take the boy out of the country and all that. I've done my time in Ballan, and i will happily never do it again! I used to commute to Geelong an hour each way every day. It's do-able but i'd rather not!

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Thanks for all your input. I think the money is burning a hole in DH's pocket and he wants to get it invested. And if i don't invest it he'll keep buying more cows! We have a whole freaking herd building up, which is fantastic as it is our school fee fund for the kids, but i'd like to invest in something else as well.
Given there is no rush i spoke to him about perhaps putting the money into a high interest account while we save at least 20% and then have a good lump sum to buy something without paying the mortgage insurance. Maybe we should see a financial advisor? (love a recommendation Tash.....)

Ginger- Oh you know me all too well. :lol: What i have to curb my country road habit??? :redface: We talked about it and are going to 'pretend' we have a mortgage and transfer that money each month from here to an account in Aus. That way it can't really be spent. Moving here has been amazing for our savings, i couldn't spend money if i tried. It has made me realise how little we actually need.

Feeb- Dh manages about 20,000 head of cattle, a big cropping operation, a feedlot and abattoirs with the help of 100+ staff. It is a huge business and there is nothing like that really anywhere in Vic. So not sure what the next step for him would be. If we did live in Vic, he could possibly move into more of a consulting role which would mean we wouldn't have to necessarily be rural. But he does get the shakes when we are close to high rise buildings. :lol: You can take the boy out of the country and all that. I've done my time in Ballan, and i will happily never do it again! I used to commute to Geelong an hour each way every day. It's do-able but i'd rather not!

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Oh wow thats a massive amount of cattle!!! Nope no where you can do that. Good luck on your decision!!

As an investment I personally would buy now and go for a Rocket Repay or similar (we have one with Westpac) where you can pay in as much as you like and redraw as much as you like as well (is o***et too so anything in the current account also o***ets the interest). The market may have stalled a little for a bit, but if you have a 10% deposit then mortgage insurance is only about 1% so in my opinion you are likely to recoup that amount quicker than takes savings to get to 20%. Being o***hore your situation might be different but you pay tax on savings in a high interest account, but by using that money to pay off a mortgage then you are making an investment but not paying any extra tax.

E.g. Everytime I think about putting any money into a high interest account, I do the sums and is actually far better for it to be working for us against my mortgage

If you can get 6.5% in a high interest account for example - and have 10,000 dollars then you would have after a year 10650, so 650 in interest less tax. If you have a mortgage say of 300000 at an interest rate of 7% having that 10000 against your mortgage for a year will save you 700 in interest and there is no tax to pay (and if you have something like the rocket repay can access the money whenever). Of course this depends on the interest rates you can get on the high interest account and the mortgage but it seems very rare that you can find a product which will actually earn you more than you would save on a mortgage.


I would speak to a financial advisor because I think because you are o***hore there might be some things that are much better to do than others (may also affect the type of mortgages you can get your hands on) - and sounds like you have a great opportunity to get ahead. E.g. you can make tax savings if you buy a property and rent it out and then later want to move into it - by doing all the work on it before you become the owner - occupier.

It cracks me up when the letters F F S get censored?! :rolleyes: Why that one when it's ok to say WTF? Why don't people just imagine it to be 'for fruits sake'? Ok... a little sidetracked! :p

Thanks for your thoughts Wys, you make some interesting points. I think a financial advisor is a good idea. We pay tax here in PNG at about 40%, i know they asses it in Aus and if they believe we need to pay more then we have to, but if they deem that we've been taxed sufficiently then we don't. But best i get a more definitive answer on that one!

I also need to find an accountant who deals with this sort of thing to do out Tax. hmmmm.

Also something to think about is that the interest component on your mortgage repayments are likely to be tax deductible (along with various other expenses associated with owning an investment property). An accountant will definitely be able to do these sums for you.

IMO, I'd buy now. The market may be slowing but it will pick up again, there's no point in trying to time it, just jump on and ride it out. Everything will balance out over the long term.

JM - tried sending you a PM, but your inbox is full

Sorry OTT a bit, but...
If it is an investment, DO NOT GO REDRAW. Use an off-set account instead - (a real off-set account, make sure you check it really is an 'off-set' and not just a redraw under another name). The ATO treats them both very differently, even though they will both minimise the amount of interest you are paying. If you use REDRAW and take money off the loan for purposes other then investment, then this proportion of the loan (ie, 2.36%) will no longer be deductible for the entire life of the loan. If you use and off-set, it will ALL remain deductible, no matter what you are drawing the funds out to pay (personal or investment).

I don't know what is rude about "off set"..... :rofl:

it's the F F S in o***et... I'll put a hyphen in it for you if you like...