Buying a house is exciting and life-changing. What’s not as much fun is saving for the deposit. But the more money you put down upfront, the less you’ll have to borrow. There are many ways to save for a home. With a good savings plan and some discipline, you’ll soon have the deposit for your home.
Often the culmination of years of squirrelling away every spare dollar you earn, reaching that target amount is no small achievement, particularly with house prices soaring in most Australian cities.
But in today’s market, how much do you really need?
Do you need a full 20% deposit, or will lenders let you in the door with considerably less?
How much deposit do you need before approaching a bank?
Contrary to what you may have heard, you don’t always need to save a 20% deposit before the banks will talk to you.
Mortgage broker and Port Finance Group director Anthony McDonald says banks are prepared to offer loans to buyers who have much less than a 20% deposit – some as little as 5%.
On a $500,000 loan that 5% deposit is only $25,000, but you’ll also have to pay lenders mortgage insurance, which the banks use to mitigate their risk of lending money to someone with little savings.
McDonald says mortgage insurance generally applies to borrowers who have less than 20% of the purchase price, and the insurance costs can be significant.
“Mortgage insurance can go up to about 2% to 2.5% (of the loan amount) when you get up around that 90% (borrowing) mark. At that point it starts to become cost prohibitive because you end up adding it to your mortgage and it becomes very costly over the journey,” he says.
“Say you borrow $500,000, it might be 2% mortgage insurance, plus the stamp duty. So it might be $10,000 to $12,000 that you’re adding on to your mortgage.”
Is a first-home buyer better off saving for a bigger deposit?
Of course, 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.
McDonald says you should factor those increases in when making your 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.
Check your loan to value ratio
When thinking about how much to save, check your(LVR). This is calculated by dividing the amount of your home loan by the purchase price (or appraised value) of the property.
Lenders use your LVR to gauge how risky it would be to give you a loan.
In general, the higher your LVR, the higher the risk the lender will not be repaid if you default on the loan and they have to sell the property. Having a high LVR may also affect your ability to refinance your loan later on, and you may have to pay mortgage insurance again if the LVR on the new loan is high.
Usually lender’s mortgage insurance (LMI) is payable if your LVR is above 80%. This is a one-off insurance premium to protect the lender should you default on your home loan.
Some lenders also use your LVR to work out the interest rate on your home loan. For example, if your LVR is more than 80%, you could be charged a higher interest rate than a borrower with a lower LVR. This could make a big difference to your repayments, so it is important to save as much as you can towards a deposit to reduce the size of your loan and try to get your LVR under 80%.
Way to Start Saving?
Moving into the family home
While it may not seem that appealing, many young people choose to move back into the family home while they are saving for their first house. Rent is likely to be one of your biggest expenses, so if you can cut this right down, you could increase your savings very quickly.
Get a high interest savings account
Once you know how much you can save, make your money work for you. If you leave it in your everyday transaction account, you might be tempted to use the cash. You will also earn less interest than you would by transferring your savings to a high-interest savings account.
Investing your savings
Have you thought about investing your savings in shares or a managed fund? This is a good idea only if you plan to buy your home in a few years time because these investments are suited to long term goals. For more information see investing.
The First Home Super Saver Scheme (FHSS)
The First Home Super Saver (FHSS) Scheme was introduced by the Australian Government in the Federal Budget 2017–18 to reduce pressure on housing affordability.
The FHSS Scheme allows you to save money for a first home inside your superannuation fund. This will help first home buyers save faster with the concessional tax treatment within super.
You can start making super contributions from any age, but can’t request a release of amounts under the First Home Super Saver (FHSS) Scheme until you are 18 years old.
You may be eligible for FHSS if you can answer yes to all of the following:
- You have never owned property in Australia – this includes an investment property, commercial property, a lease of land in Australia, or a company title interest in land in Australia.
- You are not using FHSS amounts to purchase the following type of property
- any premises not capable of being occupied as a residence
- a houseboat
- a motor home
- vacant land.
- You have not previously requested a FHSS release authority.
You may still be eligible even if you have previously owned property in Australia, if the Commissioner of Taxation determines that you have suffered a financial hardship. Regulations will be available prior to 1 July 2018 specifying the circumstances that the Commissioner is to consider when determining if you have suffered a financial hardship.