20% DEPOSIT ISN’T ALWAYS A GOOD IDEA – Think & Grow Finance

20% DEPOSIT ISN’T ALWAYS A GOOD IDEA

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A large deposit and a short repayment period may lower your interest rate. This combination can drive down the cost of borrowing dramatically, and wise old owls advise planning toward that goal. As much as we would love to avoid paying Lenders Mortgage Insurance (LMI), The majority of us who live in the real world, often begin with the stark reality of a small deposit, potentially as little as 5-10% of the purchase price.

It might sound crazy, but there’s a downside to parting with your hard earned savings.

Depending on the rest of the plan, a 20% deposit towards your first purchase is NOT ALWAYS a good idea. Particularly if you plan to buy another investment property or renovate and turn the current one into an investment property in future.

Here’s an example –

Nick has purchased a property for $600k. He put a 20% deposit down, of $120k. By doing so, he has reduced a large portion of his future tax deductible debt to $480k which he can claim against. If he decided to use a smaller deposit, say 10% or $60k, then he would be left with a future deductible debt of $540k that he could claim against.

In this case, Lenders Mortgage Insurance (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 Nick better off in the long run if he plans on holding onto his property for a while.

Also, by holding back on some of the savings that Nick 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 $60k 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 current 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).

For an honest and unbiased opinion, talk to Think and Grow Finance today on 03 8390 5855 or email [email protected]