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I want a home loan: how much deposit do I need to save?

11:00 AEST Thu Oct 21 2010
How much deposit do I need ?
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By Diana Clement, MSN Money expert

The answer to that is to save as much as you possibly can. The greater the deposit the easier it is to buy a home and pay the mortgage.

As a rule of thumb you need a 20 percent deposit for the property and can borrow 80 percent. Some banks will allow you to borrow more than 80 percent. However, you usually need to jump through hoops and you'll be charged higher interest as well as low equity fees.

These fees can add 0.2 percent to 1.25 percent of the value of the loan. That means up to $3750 on a $300,000 loan. The fee is usually added to the mortgage. None-the-less it can be avoided and is a good reason to save a bigger deposit.

It's likely that lenders will relax the rules over time and at some point 90 percent or even 95 percent mortgages for first-time buyers will become the norm again. For now you'll need to get your saving socks on.

Believe it or not, you can buy a property without a deposit — if you're accepted by the government's Welcome Home Loan scheme. How it works is the government guarantees your loan, which enables mainstream lenders to offer 100 percent mortgages without additional fees.

To qualify for a Welcome Home Loan you can't earn more than $85,000 a year per couple, and you can only borrow a maximum of $280,000, or up to $350,000 in selected areas where house prices might be higher. That's plenty for a basic first home, unit or apartment. It won't be enough if you're looking to buy a flash house.

The reality is that 100 percent loans aren't necessarily a good move for everyone. Buying a home is a big financial commitment and that period of saving for a deposit is a very important rite of passage. It shows that you can be adult with your money.

Not everyone in New Zealand saves their first deposit. Some are given the deposit by their parents, or that older generation extends the mortgages on their own homes to help their children into their first home.

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