‘Deposit’ can be a confusing word because it can mean two different things. First, you will need to pay a 10% deposit as part of the Contract. Next, a lender will expect you to have a deposit before as part of getting a loan.
It is your total contribution that we ate looking at here and it can be made up of different things:
- Family gift
- Family equity guarantee
- Government grants
Whether you want to take out a loan for a renovation project or a new build, the lender will expect you to make some sort of contribution.
A 20% contribution is typical, although you could contribute just 10% if you were willing to pay lender’s mortgage insurance.
One way to pay that contribution is through cash savings. Another is to borrow against the equity in your current home, and use that new loan as your contribution.
The simplest way to fund your contribution is to dip into your savings, because you have instant and guaranteed access to the money.
However, you might not have enough savings to fund your contribution. Or you might have enough savings, but prefer to leave that money untouched so it’s on call for some other use in the future. In that case, if you’re a homeowner, you might be able to tap into the equity of your current home.
Borrow against your equity:
Equity is essentially how much of the home you own (as opposed to how much the lender owns). Let’s say, your home was valued at $850,000 and you had $500,000 left on your mortgage, your equity would be $350,000.
We have talked in detail above about how banks value a property and how this may be relevant to you and how it can impact what you are trying to achieve.
If you want to tap into your equity, lenders will generally allow you to borrow 80% of the property’s value minus the outstanding mortgage. In this example, your available equity would be $180,000:
It is possible to borrow more than 80% of the value of a property, but as soon as you do you will pay Lenders Mortgage Insurance (also called LMI).
When building we do need to be careful to understand each lenders policy on LMI loans with construction to make sure it is possible and we pick the right option. Each leader will have different LMI fees and different interest rates, so we need to take time to make informed decisions.