How much should you save for a house deposit?
In my last blog post, I wrote about why first-time home buyers need to be motivated and fully committed when they start this journey.
So, how committed are you?
Now is the time for honesty. Ask yourself, what sacrifices am I prepared to make, and will they be enough to help achieve my goal of buying my first home?
If you are fully committed, now is the perfect time to start planning. Remember, the more you can save for a house deposit now, the less financial stress you'll endure later in life.
The question every first-time buyer asks is, “how much deposit do I need to buy my first home?” Before you can answer this question, I believe there's another question you need to ask yourself first. It's one that most first home buyers don't take the time to think through.
What does my first home look like?
Why is this question important? Because, once you have a clear picture of your first home, you'll be able to estimate its ‘ballpark’ value. Only when you have a ballpark value will you be able to determine how much money you’ll need to save for a house deposit.
When you try to ascertain a ballpark value for your first home, I don't expect you to arrive at a precise dollar amount. Instead, aim for a realistic range. For example, will your first home cost $300,000 to $350,000, or will it more likely be $800,000 to $900,000?
When I started the search for my first home, it was with a clear picture of the type of house I wanted to live in. I envisioned a two bedroom apartment, with a large open-plan living area, excellent views, and access to natural light.
My parents have always had a keen interest in real estate, and I’ve learnt a lot from them. An important lesson mum taught me was, “when it comes to selecting real estate, the property must be unique".
Following mum’s rule, I wanted my first home to be above and beyond your standard two bedroom apartment.
When I thought about the location of my first home, my priority was to be close to work. However, I still wanted to be near friends and family too.
Based on my specific criteria, I started looking for a two bedroom apartment in Melbourne's inner north.
When my wife and I started looking for our first home together, we had a different set of criteria. We wanted a house where we could start a family. I also had my heart set on a renovation project.
So, we started looking for a two bedroom house, with a distinctive period facade, that was structurally sound but in original condition. It needed to be on a block of land large enough for us to add on a rear extension, with enough space left for some lawn and a veggie garden.
Another important consideration was my wife's desire to be able to catch the train to work each day. This meant we needed to be in walking distance of a train station.
So, where should you begin? My advice is to start by narrowing down your preferred location to a handful of suburbs. Check out my post, How to find the best location for your first home for more information.
Once you have a location, think about the type of house that will meet your specific needs. My post, What are the six major house types has some useful tips.
Once you have a clear picture of your first home, the following resources will help you to estimate its ballpark value.
Enter your preferred suburb on the Neighbourhoods page at realestate.com.au to obtain the median house price. You can look at the median price for a 2, 3 or 4 bedroom house or you can choose to look at the median unit price.
Use the Sold page at realestate.com.au. Here you'll be able to find the exact selling price for homes similar to the one you have pictured in your mind. This approach should give you a more accurate indication of what your 'ballpark' value will be.
Once you have a ballpark value range, you can calculate how much deposit you’ll need to save.
But first, an important reminder. Any money that you're saving for your deposit needs to be put into a high-interest savings account, or the First Home Super Saver Scheme.
The magic number you need for a house deposit is 20% of the purchase price. I suggest you use the higher amount from your ballpark value range as your 'purchase price'.
If you're able to save this amount, banks consider you to be a low-risk proposition and will happily offer you a home loan. If you’re just starting out, this should be your goal!
On top of the deposit, you'll also need to pay stamp duty. Stamp duty is a state government tax, and the amount you're required to pay differs from state to state.
Some states have introduced concessions for first home buyers which may reduce or exempt you from paying any stamp duty. Visit the Stamp Duty page at Calculators Australia to determine precisely how much stamp duty you'll need to pay.
I understand that in today's housing market, a 20% deposit is a big chunk of change. At the time of writing this, the Sydney median house price was approaching $1,000,000 with the Melbourne median price not far behind. To buy a house in one of these cities with a 20% deposit, you'd need to budget $200,000, plus additional funds to cover stamp duty.
If you're looking to buy in Brisbane, Adelaide or Perth, where the median house price is closer to $500,000, you'd still need to have saved at least $100,000.
If you don't have a 20% deposit, don't worry, it doesn't mean you can't buy your first home now. It's not unheard of for a bank to offer a home loan to a purchaser with only a 5% deposit saved. However, your bank will require you to pay Lenders Mortgage Insurance (LMI). Depending on the value of your first home and the size of your deposit, LMI could be thousands of dollars.
When I finally found an apartment that met my criteria, I'd only managed to save about 10% of the purchase price. However, I was fortunate enough that my mum was in a position where she could be a guarantor on my home loan.
By having a guarantor, I didn't have to pay LMI. While this was a great result, there was a downside. By signing as guarantor, my mum became legally responsible for paying back the loan in the event I no longer could.
The number of first home buyers relying on the Bank of Mum and Dad has increased dramatically in recent years. If your parents agree to be a guarantor on your home loan, be aware, you're putting them at risk! I recommend visiting the Australian Government's Money Smart website to learn more about Loans Involving Family & Friends.
Remember, having a 20% deposit is a sure-fire way of knowing you're ready to buy your first home. If you're well short of this mark, ask yourself, am I truly prepared for this big step? It may be wise to take some time to create a savings plan and prove to yourself that you can stick to it.
Before you rush off to open that high-interest savings account, there is one more thing you need to be aware of. It's Home Loan Serviceability. Ever since the Banking Royal Commission, lenders need to ensure that when they provide you with a home loan, you will be able to repay it. Expect the bank to go through your financial history with a fine-tooth comb. How much do you spend too much on your gym membership? Do you have an online gambling account? Do you have any overdue parking fine? The bank wants to know about your expenses, as well as your debt liabilities.
Now more than ever, you need to have your finances in order before you apply for a home loan. Check out the Australian Government's Money Smart website to learn more about the steps you can take to Improve Your Loan Application.
If you are ready to buy your first home now and you don't have a 20% deposit, make sure to check out my next post. I will be joined by mortgage broker Daniel Rainey from UFinancial to answer your questions on LMI. If you have a specific question that you would like Daniel to answer, email firstname.lastname@example.org and we will try to answer it for you in the next post.
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