How much do you (really) need for a house deposit?

When you’re planning to buy your first property you spend hours on real estate sites, sighing over the video tours and ads about easy home loans and fantasising about how great it’ll all be when you can finally knock a nail into your own wall.

That wall, however, is only going to be hammered when you’ve knocked down the bigger, tougher, taller wall that is raising the deposit (OK, enough about walls now…)

Most Aussies face several years of austerity, overtime and planning to raise this most crucial of sums; many feel constantly discouraged because they often see property prices outrunning their efforts.

If you’re about to embark on this campaign yourself, then it really helps to have a target as well as a plan. It’s not just about asking “How much can I borrow?” 

There’s lots of confusion about how much of a deposit you actually need, so if you can pin this amount down, you at least know what you’re working towards.

Think in percentages

The only thing is, however, that rather than having a fixed number as a target, you need to aim for a percentage of the most likely purchase price. A further complication is that if you’re using a percentage as a target, it’ll keep moving as property prices rise and fall.

This leads you to wonder how much you should aim for. Do you have a short, sharp austerity campaign to raise a five per cent deposit so you can hop onto that ladder sooner? Or do you hunker down for longer so that you can pay off a bigger chunk and lower your monthly mortgage repayments?

Do your maths homework

You should have a good idea of how much properties of various sizes are in your ideal neighbourhood. Part of your planning is to keep an eye on these figures and to watch out for any developments––a new bus station, a well-performing school––that could suddenly send them skywards.

When you have a ballpark figure, you can then start playing with the variables to find your optimum deal. A small deposit on a medium-priced place will get you moved in sooner, but you’ll be paying more each month. Alternatively, you could save for longer to lower your monthly payments, but you risk being outrun by sudden spikes in values. Somewhere in these calculations is your ideal balance and you need to find it before you approach lenders.

What do lenders want from you?

Lenders will want at the very least a five per cent deposit and probably more. There’s no such thing as a “marching up to a lender and asking how much can I borrow” home loan, and for good reason. Lenders are taking a risk when they give you a mortgage so ideally you need to have a decent amount of equity in the property to start with, just in case things go wrong.

If you do only have a small deposit––maybe five to 15 per cent of the purchase price––then you’ll need to demonstrate a good employment record and credit rating to prove that you’re a good risk. Then there’s the Lenders Mortgage Insurance (LMI) to contend with.

The Lenders Mortgage Insurance

People coming to the property market with smaller deposits––under 20 per cent of the purchase price––will need to pay LMI.

Whilst having a 10 per cent deposit is better than a five per cent one because you’ll get slightly lower monthly repayments, you’ll still need to pay this insurance. LMI actually protects the lender against you being unable to pay the mortgage or defaulting; it does nothing for you. The premium is calculated on the value of the property, how much you’re borrowing and whether you’re still in first time buyer territory.

Some lenders want the LMI as an upfront payment but most will tack it onto your monthly repayment so you don’t need to find the cost at the beginning. Usually, if you’re borrowing more than 80 per cent of the property price then you’ll have to pay LMI.

Most LMI premiums are between 1.5 per cent and three per cent of the loan value, but this varies with your employment record, the size of the loan and how long the term is. The biggest advantage of saving up a bigger deposit is avoiding this premium, as they’re often $10,000 to $15,000. This is before you take into account transfer duty and legal fees.

So, how much do you need to save?

It’s obvious by now that this is a fluid figure. You need to look at how much you can save in how much time, how much mortgage you can afford to pay each month and how much your ideal home costs. Thankfully, when it comes to home loans Australia has lots of providers so you’ll most likely be able to find one to suit you and your circumstances.

Get advice before approaching your lender

You should spend time on a comparison site before you make any serious moves so that you have a good idea of current interest rates; then talk to a broker to see if they can help you to knock a few points of the interest rate. If you’re looking for fast home loans, you need people with the experience and smarts to help make it happen.

If you need some extra help…

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.

There are a number of government grants that can help you to buy your first home. These grants and concessions, and their eligibility criteria, vary by state, but you should definitely check if you’re entitled to any help as it can make it much easier to get on the ladder. Some grants offset part of the transfer duty, while the First Home Owner Grant (FHOG) helps first-time buyers purchase a new-build property with payments of between $10,000 and $26,000.

Compare home loans from all of Australia’s major banks, credit unions, building societies and non-bank lenders here.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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