Saving enough money for a home deposit is the Holy Grail for first-home buyers.
Often the culmination of years of squirrelling away every spare dollar you earn, reaching that target amount is no small achievement.
But, in today’s market, how much do you really need? Do you need a 20% deposit? Or will lenders let you in the door with considerably less?
Here’s what you need to know.
How much deposit do I need to buy a home?
While traditionally it’s been thought that a 20% deposit is the minimum, nowadays it may be more financially prudent to have a lower deposit rather than waiting to save while the cost of housing increases, according to finance specialist John Tindall, from Accumulus Home Loans in Sydney. This will depend heavily on your personal financial circumstances and the housing market in which you’re trying to purchase.
You will normally need to put down a deposit that is equal to at least 5% of the sale price to buy a house. For banks, that’s usually the lowest deposit they will entertain – although many will require significantly more. A 5% deposit on a $500,000 loan equates to $25,000, which is far less than many prospective buyers imagine their deposits will need to be.
Tindall says that “despite all lenders tightening their lending criteria, there are still lenders who require only a 5% deposit”.
Example Deposit Amounts
Not sure if your deposit is enough for the price of the home you want to buy? We’ve put together a rough guide for the minimum 5% deposit for various house prices.
What other upfront costs do I need to pay
Here are some other costs to consider when buying a home
- Conveyancing and legal fees
- Stamp duty
- Building and pest inspection
- Mortgage registration fee
- Transfer fee
- Loan application fee
- Lenders Mortgage insurance (LMI)
- Council and utility rates
Used to mitigate the risk of lending money to someone with little savings, the one-off Lenders Mortgage Insurance fee, the amount depends on the size of the loan and which lender you go with, is generally applied to borrowers with a deposit that’s less than 20% of the purchase price.
“At 95% for a family home, LMI can add up to 5%,” says Tindall.
“This is not necessarily a bad thing if it means getting the property you want [rather than] missing out.
Want to avoid paying stamp duty? Here are some ways to save:
- Buy your first home
- Buy or build a new home
- Buy a cheap home
- Buy a home to live in (not an investment property)
Federal government first home buyer incentives
There are a number of ways the government can assist with buying a home.
First Home Loan Deposit scheme
The First Home Loan Deposit Scheme is designed to help first home buyers enter the market quicker by providing a guarantee on 15 per cent of a new home’s value. This means eligible first time buyers can potentially purchase a property with as little as five per cent deposit without having to take out Lenders Mortgage Insurance.
In its latest budget, handed down at the start of October, the Federal Government announced an extension of the scheme.
The government will fund a further 10,000 places in the scheme over the 2020-21 fiscal year to help more Australians buy their first home.
First Home Super Saver scheme
The First Home Super Saver Scheme is a government scheme that allows first-home buyers to access their super to help buy a property.
However, it pays to read the fine print here: The scheme only allows buyers to access the additional super payments they’ve made for the purpose of buying a home. This means they need to make extra voluntary contributions into the First Home Super Saver (FHSS) Scheme, which they can then withdraw when it comes time to buy.
This enables buyers to take advantage of the favourable tax treatment superannuation receives. The first $25,000 that goes into your super account each year is taxed at just 15% not the usual marginal rate.
Any compulsory contributions your employer makes, as well as your own voluntary contributions, are counted towards this threshold. That means you could be contributing more towards your home deposit because less will be eaten up in tax.
First Home Owners Grant
This state government grant is aimed at discounting the amount first-home owners pay depending on whether they buy property in metro or regional areas or whether it’s a new or established home.
For example, in Victoria the grant is $10,000 for those buying in metro areas but doubles to $20,000 for those looking in regional areas. In South Australia the grant is only eligible for first-home buyers who build their own home or buy a brand new dwelling.
Is a first-home buyer better off saving for a bigger deposit?
In today’s rapidly changing markets, waiting a few extra months to save additional money to avoid paying mortgage insurance might mean that the properties in your price range increase in value by much more than the cost of the insurance.
Which is why mortgage broker and Port Finance Group director Anthony McDonald says you need to factor in these increases when making a decision about when and how much to borrow.
“Sometimes it’s better for the customer to go into a property and pay that insurance, knowing that by the time they try and save that money to avoid paying the mortgage insurance, the market’s moved another 10% or 12% and they’re actually behind even further,” he says.
“The more you can give the bank, the better, because the less interest you’ll pay. But it does just come down to individual circumstances. How good is your income, how long have you been in your job? You might have just got a good pay rise, so you can afford to make those repayments.
“The rates and fees are what they are. It’s just a matter of mining through the options to get to the loan that suits your needs.”