Working in home lending, I have been asked the question many times. Should I save more or should I increase my income? Sadly, there is no simple answer, as everyone is in a slightly different situation. However, I can say, that you can’t have one without the other.
For example, if you’re earning $200,000 a year, you will likely be able to afford to take out a pretty decent home loan but if you have $4 in your savings account to put towards the deposit, you’re probably not getting the loan even though you could service for it.
Serviceability for a loan isn’t everything. I had a couple sit with me who had no personal debt and were both on strong incomes but couldn’t afford to buy the house they wanted, not because of their serviceability to afford the loan, but because they couldn’t put in the minimum 3% deposit that we needed.
Remember, in most cases, any home loan in Australia that requires more than an 80% lend (85% if you’re a first home buyer) will incur Lenders Morgage Insurance. That means if you don’t put down 20% for the loan or 15% if you’re a First Home Buyer, LMI is added to the overall purchase price of your home.
Also, you must take into account that the less of a deposit you have, the more LMI will cost and the likelier that you may be denied LMI cover. Therefore, even if you’re on a really high wage but have minimal savings, you might not be able to complete the purchase unless a bank and their LMI provider is willing to give you a loan worth 100% of the purchase price (very unlikely).
In saying that, it works the other way around too. You may have $200,000, which you have received from your parents as a gift to put towards your first home worth $300,000. You’re no longer in LMI territory here, as you have more than enough of a deposit but you still need a loan to cover the rest of the purchase. Now, if you’re making under $30,000 a year with a car loan, maxed-out credit card and HECS debt, you may not be able to service the loan repayments and therefore, still be denied the loan even with such an amazing deposit.
As you can see, you can’t have one without the other. Yes, there are ways you can get away with having less than a 20% deposit but that can only be stretched so far and you’ll pay for it. Therefore, you need to find the sweet spot between the two, as both are needed for the perfect outcome.