Saving up for a deposit is one of the biggest challenges for first home buyers.
For most Australians, they go through years and years of planning, cost-cutting and sacrifices to reach that lucrative savings goal.
There is much confusion and debate over how much you actually need to save up for a new home.
In reality, there is no simple answer to this question, and this is further evident by the uncertain state of the property market right now.
Should you settle for a 5 per cent deposit or wait to make a larger down payment?
To answer this, you need to find out how much you are willing to save, what you can afford to pay in monthly loan repayments and how long you’ll be able to service a loan for.
Here are the most important factors to think about before you approach the big banks or a lender.
How much do you need to save?
For most major banks and lenders, you need to pay upfront at least 5 per cent of the purchase price of the property.
Low deposits are a greater risk for lenders, so you will need a strong employment history and financial record to prove you can repay the loan. Another downside to low deposits is you have to pay higher interest rates and Lenders Mortgage Insurance (LMI).
If you can afford a larger deposit of 10 per cent to 20 per cent, you can enjoy the benefits of paying lower interest rates, but you still need to pay the LMI premium.
Lenders Mortgage Insurance
Lenders Mortgage Insurance is a type of insurance that protects lenders in the event you default on your loan repayments. Your LMI premium is calculated based on whether you are a first home buyer or not, the property value and how much money you are borrowing.
Depending on the lender, the LMI is either paid upfront or as part of your monthly loan repayment.
Typically, you have to pay the LMI if you are borrowing more than 80 per cent of the purchase price of a new home.
For example, if you are a first home buyer and the property value is $750,000 financed with a loan of $675,000 (you pay a deposit of 10 per cent): the LMI premium will be $15,052.50.
Home buyers who pay more than 20% of the purchase price of the property can typically avoid paying the LMI premium. This is perhaps the biggest advantage of saving up for a larger deposit and could save you up to $15,000 or more.
Of course, you still need to pay the stamp duty, title transfer and other associated costs.
Calculating your deposit amount
The amount you need to save up for a deposit depends on a number of factors. Firstly, how much can you afford in monthly loan repayments? What is the estimated value of your ideal property? And how much are you willing to save up?
If you have outstanding debts or student loan repayments, this may also impact your ability to build genuine savings and repay your home loan.
An online deposit calculator is an easy way to figure out the minimum deposit amount you need to save up for.
By taking into account your financial circumstances and investment plans, you can find out how much money you will have left after you pay stamp duty and other upfront costs.
Before you approach a bank or lender, it might be a good idea to consult a mortgage broker.
They can help you determine the ideal price range of your property purchase and minimum cash deposit.
With their negotiating skills, they may also be able to secure a better deal on your home finance loan.
Government grants and concessions
You may be entitled to a number of government grants and concessions depending on the eligibility criteria of your state and territory. These government-funded grants make it easier for first home buyers to get their foot into the property market by offsetting stamp duty, title transfer and other costs.
The First Home Owner Grant (FHOG) is a government-funded scheme that helps eligible first home buyers purchase a new home or build their own.
Depending on your state or territory, you can receive between $10,000 and $26,000 in grants for the purchase of a new home valued at $600,000 to $750,000.
What if you are buying an existing property? You may be eligible for a First Home Owner Concession or Assistance scheme. This provides exemptions on transfer duty for new and existing properties, including land you purchase to build a new home on.
