If you’re going to do a skydive, you want the gear getting you from the plane to the ground to be 100% perfect, right? We’d call that managing your risk, and it’s what the banks do when they assess your home loan application.
You want to be down on the ground, unhurt with a success rate of 100%, the same as the bank wants you to pay back the money they’ve leant you to purchase your home.
Understanding risk is a good way to think about the differences between a 10% and a 20% deposit. If you’re buying a $400K house and you have $40K to contribute (10%), you have less “skin in the game”, than if you had 20%. Therefore you have more to pay back and there is more risk to the bank in lending you that money.
To prove that risk to the bank is low, there are three big things that impact on your ability to borrow with less than 20% deposit;
- Current debt
- History with money
You want that guy who is jumping out of a plane with you to be the top of his class at skydiving school, right?
This is similar to how a bank looks at a borrower with a lower deposit.
- Have they shown a commitment to buy their first home?
- Do they save well?
- Are they spending frugally and showing that they have enough money each week in their hand to pay their mortgage, even if the rate goes up to 7%?
- Do they manage their money well each week, meet their financial commitments, and save for bigger items they need like TVs, Fridges and Cars?
Like your skydiving instructor getting you to the ground safely, the bank’s perfect borrower will be all of these things and they are first in line when money gets dished out over 80%.
If you want that to be you, have a chat to us about the best way to put those plans in place, and get you into your first home faster.
Adam, Claire and the My Mortgage Team