A large deposit and a short repayment period may lower your interest rate. This combination can drive down the cost of borrowing dramatically. 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 Wholistic Finance on 0427 918 232 or email daks@wholisticfinance.com.au

Disclaimer: The Information is general in nature and does not consider your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made because of the information provided without first seeking expert financial advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.