SHOULD YOU AIM FOR A 20% DEPOSIT?

So you’ve saved your 20% deposit and enough funds to cover the purchase costs and are ready to venture out and buy your first property.

This might sound crazy, but have you considered the downside to using all of your hard earned savings to cover the 20% deposit towards your first purchase?

Most people believe it’s in their best interest to save the large 20% deposit and put it all towards their first property because that way they can avoid paying Lenders Mortgage Insurance (LMI).

What a lot of people don’t realise is that this can be a costly mistake in the future – particularly if the property turns into an investment property down the track.

Let’s look at a scenario

By paying a 20% deposit, John is reducing a large portion of this future tax deductible debt. For instance, if the loan was $500k and John put $100k towards it, he would be left with a future deductible debt of $400k which he can claim against. If he decided to use a smaller deposit, say 10% or $50k, then he would be left with a future deductible debt of $450k that he could claim against. If the repayments are set up as principal and interest – the $450k will reduce over time but the total loan balance John will be able to claim will still be higher than if he had of parted with a 20% deposit.

In this instance, some LMI would be payable as the Loan to Value Ratio (LVR) would be 90%. However, the ability to claim the additional loan interest should see John better off in the long run if he plans on holding onto his investment property for a while.

Also, by holding back on some of the savings that John was going to use as the deposit he has established a “contingency fund” which is always important when building a portfolio. He can place that spare $50k savings into the offset account against his current property and he’ll be paying less interest on the loan and when he does decide to convert it into an investment property, he can move the cash out of his offset account (increasing his deductible debt back to its original level) and move it onto his new owner occupied home (and reduce his non-deductible debt).

Jamie

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If you’d like to have Jamie provide advice on your finance structure, investment strategy, first home purchase, upgrade or refinance simply complete and return this FORM and he will be in touch – this is a FREE, no obligation service.

The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.