If you’re ready to make the leap onto the property ladder, the first thing you’ll need is a deposit. But exactly how much you’ll need to save will depend on a few factors, including what you can afford to borrow and how much your ideal property costs.
Your overall financial situation, and in particular, your income and expenses, can be a good guide when considering how much you can afford to borrow. They’ll give you an indication of how much money you have each month to cover loan repayments. The AMP borrowing power calculator can help you work out how much you might be able to borrow.
When considering this, it’s also important to remember that interest rates do change, so you might consider building a buffer into the repayment amount so that you’d still be able to cover your loan repayments if interest rates rise.
How much deposit is needed?
Typically, a 20% deposit, or down payment, is required when buying a home, although in some circumstances it may be possible for home buyers to have as little as a 5% deposit.
When thinking about saving for a deposit, the table below will give you an idea of how much money you might need, based on a range of purchase prices.
|Purchase Price||5% deposit||10% deposit||20% deposit|
On top of your house deposit, you’ll also need to save enough to cover the other upfront costs associated with buying a home such as legal fees, building and pest inspection fees, stamp duty, moving costs and insurances.
If you’re hoping to secure a loan with less than a 20% deposit, bear in mind that you’ll also likely be required to purchase lender’s mortgage insurance (LMI).
However, trying to save as much as you can for your house deposit is a good idea, as the more money you can put towards your deposit the less you’ll need to borrow, which will mean lower loan repayments and paying less interest on your home purchase over the long term.
Why do I need a deposit?
The amount you borrow relative to the property’s value is known as the loan to value ratio (LVR). The higher the LVR, the more money you owe and – in the eyes of banks and other authorised lenders – the greater risk you pose.
As a result, lenders require home buyers to have a deposit amount because it reduces their risk. When the buyer has a significant financial stake in the property it’s considered less likely that they’ll default on their loan repayments.
In saving for a deposit you’re also demonstrating to lenders that you have the ability to save money, which makes it more likely you’ll be able to budget for your loan repayments on an ongoing basis.
How to save for a deposit
When you begin saving for a deposit it can be helpful to have clear objectives upfront, such as a target amount you’d like to save over a set period of time, and a clear picture of your financial situation.
To start saving, it’s important to have a budget and understand what money you have coming in (your income) and what outgoings you have (your expenses). The difference between the two – your surplus – is the first place to look to determine a regular amount you can begin saving.
Keeping your deposit savings on track
Here are some tips you might consider:
- Open a separate savings account for your house deposit.
- Set up an automatic transfer to avoid the temptation of spending your money rather than saving it.
- Reach your goal faster by topping up your savings with any additional money left at the end of the month, or when you receive a tax refund or work bonus.
It’s important to compare products and services when looking for a savings account, such as the interest rate on offer, how accessible your money is, the fees charged and whether the account pays additional interest if you deposit a minimum amount each month.
What if you don’t have a deposit?
If you don’t have a deposit, or have less than a 20% deposit, it may make it harder to get a loan, but there are still a few options available to you.
Lender’s mortgage insurance
If you have less than a 20% deposit, most lenders will require you to take out lender’s mortgage insurance (LMI).
LMI is a type of insurance that ensures the lender doesn’t lose out if you can’t make your repayments and they have to sell the property for less than the amount owing on your loan. It’s charged as a one-off premium and can either be paid in full as an upfront cost or added onto the amount you’re borrowing (which also means you’ll pay interest on it).
If you’ve got a small – or no deposit – and want to avoid paying for LMI, one way to do this might be to have someone act as a guarantor for your home loan. This will typically be an immediate family member such as a parent.
Under this arrangement, the property you’re purchasing acts as partial security for the lender, and the equity in a property owned by the guarantor provides additional security. This means the guarantor’s property and credit rating could be at risk if you can’t make your loan repayments, so it’s important that everyone involved understands the risks and reads the loan’s product disclosure statement carefully.
Deposit protect bond
If the money you’d use for a deposit is tied up in other investments and not immediately available, you may be able to use a deposit protect bond in lieu of a cash deposit.
Some examples of when this might be useful are if you’re waiting for funds to come through from the sale of a property to use as a deposit on a new property, or if you’re buying a property off-the-plan with a long settlement, as your deposit can continue to earn interest in other investments until the settlement date.
There are costs involved in getting a deposit protect bond, which a mortgage broker can help you arrange. However, it’s worth checking whether the vendor and real estate agent or developer of the property you’re interested in buying will accept one first.
If you’re a first home buyer you might be eligible for government assistance when buying a home. This could include:
- First Home Owner Grant – under the scheme, a one-off payment (that can be used towards a deposit) is provided to first home buyers who meet the criteria. Find out more about the grant and select your state to see if you’re eligible.
- Stamp duty concessions – certain state and territory governments offer additional incentives to first home buyers, such as stamp duty concessions so research what’s on offer in the state where you’re buying.
- First Home Super Saver Scheme - this scheme allows first home buyers to save for a house deposit within their super fund. Eligible buyers can apply to release personal voluntary super contributions of up to $30,000 for individuals and $60,000 for couples, as well as associated earnings, that they’ve made from 1 July 2017 to help buy or build their first home.
Tips for saving for a deposit
Address your expenses
If you don’t have a surplus, you might need to tackle your expenses. Separate out those that are essential (such as rent, food and utility bills) from your discretionary expenses such as new clothes, gym memberships and eating out. Once you’ve identified these, you can consider which you can cut back on – perhaps you cancel your pay TV subscriptions, swap the gym for home exercise or compare providers to see if there are savings to be made when it comes to utility bills. AMP’s expense planner calculator can help.
Consolidate your debts
If one of your expenses is paying off debts such as credit cards or a personal loan, you could consider consolidating these to minimise your interest repayments and try to clear them as quickly as possible to avoid paying unnecessary interest. Not having any outstanding debts could also make it easier for you to qualify for a home loan.
Saving for a deposit takes time and discipline. But reaching your goal of buying a home usually makes the short-term sacrifices worthwhile.
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