We’ve all heard the news – it’s taking us longer than ever to save for a deposit.
A study from Bankwest at the end of 2017 looked at how long it would take two Australians aged between twenty-five and thirty-four on an average income to save enough for a 20 per cent deposit.
The study found that across the nation, it would take a couple an average of 4.6 years to save this amount. Perth had the best result, taking first home buyers 3.9 years to save the deposit, while at the other end of the scale in Sydney, buyers require 8.2 years to save for a deposit.
But before you can work out how long it will take you to save up for a deposit, you need to work out how much of a deposit you will need.
So, how much do you actually need for a deposit?
There is no set answer to this question and it depends on a range of factors.
Loan to value ratio
To get started, it’s important to understand what loan to value ratio (LVR) is. Essentially, this is the amount of money you borrow compared to the value of the property.
You can use this simple formula to work out your LVR:
LVR = mortgage price / property price.
So if you have a $50,000 deposit for a $500,000 house (a 10 per cent deposit), your LVR will be 90 per cent.
A higher LVR is considered more risk to lenders.
The bigger the better
In a nutshell, the bigger the deposit, the better. This if for a number of reasons:
- Firstly this shows the bank you are a good saver. This can improve your chances of being approved for a home loan
- You will acquire less interest on your home loan, meaning you’ll pay less over the life of the loan
- You might be able to pay the loan off faster
- A major benefit of having a deposit of 20 per cent or more is that you won’t have to pay Lenders Mortgage Insurance (LMI)
A deposit of 20 per cent or more is considered ideal.
Say for example you want to buy a $400,000 house, this means you’ll need an $80,000 deposit. If you want to buy a house worth $1,000,000 a 20 per cent deposit will be $200,000.
Realistically, this isn’t always possible.
While 20 per cent is a good guide, many banks are willing to finance home purchases of up to 95 per cent. That is, you would need a 5 per cent deposit.
Looking at this ratio for a $500,000 house for example, you would need a $25,000 deposit to make up five per cent.
Small deposit considerations
If you go down this route, keep in mind that as the amount you are borrowing is larger, you’ll have to pay more interest on the loan over time.
Additionally, it may also take you longer to pay off the loan. Carefully consider if this is something that is viable depending on your age and other personal factors.
If your deposit is less than 20 per cent, you’ll need to factor in the additional cost of LMI.
Lenders Mortgage Insurance
LMI is generally charged to those with a deposit of less than 20 per cent. In this situation, the borrower is considered higher risk so LMI essentially protects the bank should you default on your loan.
Additional home buying fees and costs
Keep in mind that when buying a home, there will be other fees and buying costs in addition to the deposit, so remember to factor these into your savings.
These include costs such as stamp duty and conveyancing fees.