How much deposit should I be saving?
There’s no one size fits all when it comes to the size of your home loan deposit. Traditionally, banks required borrowers to contribute a 20 per cent deposit; however, today lending criteria is changing for the better providing first home buyers in particular with the ability to get into the market sooner, sometimes with as little as a 5 per cent deposit. So how much of a deposit should I really be aiming for?
These changes also provide first home buyers with greater flexibility, giving them the option to retain some of their savings to put towards items such as renovating or investing, instead of having to contribute every cent saved to a deposit.
While this flexibility means first home buyers often have more options, in most cases, purchasing your first home is still a long-game activity and regardless of how big or small your deposit is, it will no doubt take some time to save.
We’ve listed a snapshot of the various deposit options worth considering below:
Low deposit home loan
A low deposit home loan allows you to purchase a property with a 5-10 per cent deposit and borrow the rest.
Lenders impose two additional requirements with low deposit home loans; they require the borrower to show evidence of 5 per cent ‘genuine savings’ and to purchase Lenders Mortgage Insurance (LMI).
Despite these additional requirements, low-deposit home loans have some key advantages, which include the following:
- You can enter the property market sooner
- You’ll have additional funds left over for personal use
Guarantor and other deposit options
A Guarantor Loan allows you to borrow up to 105 per cent of the purchase price to cover purchasing costs such as stamp duty, legal fees and bank fees.
A guarantor could be a parent or close family member offering up some of the equity in their own property to guarantee your deposit.
The guarantor does not physically hand over the deposit to you; the lender will register a mortgage against the guarantor’s property or asset for the deposit. This can be up to 25 per cent of the purchase price of your property.
If your guarantor does not have an existing property or sufficient equity but they have some savings, they can provide you with a non-refundable gift that can go towards your deposit.
For more information on guarantor loans, visit our blog, ‘Using a Guarantor to Purchase a Home.’
First home buyer government incentives
First Home Buyers have access to various government incentives such as Stamp Duty Exemptions and Concessions, First Home Owner Grants, First Home Loan Deposit Scheme and First Home Loan Super Saver Scheme, which can go towards the required deposit.
So, how much should you save?
That’s an important question and the answer isn’t black and white. More often than not, when you are planning to purchase a new home you have a budget in mind. Considering the current climate and changes to deposit options, in most instances you will need a minimum of 5 per cent of the asking purchase price as a deposit. So, if your budget is $550,000, 5 per cent of that is $27,500.
Your budget is also often linked to where you would like to buy. Property costs vary significantly from state to state and city to city. According to the Domain First Home Buyer Report for 2020, for a couple aged 25-34 on average wages, the path to saving for a 20 per cent deposit for an entry level home is currently six years, compared to an entry level unit at four years and three months. However, if they’re eligible for the first home loan deposit scheme, the pathway to purchase is significantly reduced to 18 months for an entry-level house and one year for an entry level unit.
Deposit aside, there are often other costs that may arise, for instance, for Lenders Mortgage Insurance, professional fees like conveyancing, potentially stamp duty and so on.
Throughout this journey, you need to weigh up your priorities and options. While a bigger deposit is nearly always desirable as it means you are likely to pay less interest, you also run the risk (or potentially benefit) from the changing property market, meaning prices can increase and decrease.
Regardless of the size of your deposit, demonstrating good financial habits will put you in the best position for lenders to consider. Showing a regular and genuine savings pattern will help a lender to establish that you can make mortgage repayments.
What if I am looking to invest?
If you’re looking to purchase an additional home as an investment, you may be in a position to use the existing equity you have built on your original home loan over time. This equity may be able to assist you with the purchase of another property as opposed to having to save up for another cash deposit. Traditionally lenders require a 10 per cent (plus purchasing costs) deposit for an investment property which can be made up of a combination of savings and equity that you may have built up in your current property.
When wanting to calculate your property’s equity position, work out the current market value of your property and subtract the current balance of your mortgage to determine your current equity position. Unfortunately, most lenders won’t allow you to use all of the equity, so it’s best to speak with a mortgage broker to calculate how much of your equity could be put towards a deposit for investing in property.
What are the benefits of having a larger deposit?
Having a larger deposit can also help you secure better loan terms, such as a lower interest rate and potentially lower loan repayments. This, in turn, can help you build equity in your property faster and reduce the amount of interest you pay over the life of the loan.
Who can I speak to about how much of a deposit should I really be aiming for?
While all of this might seem overwhelming, it doesn’t have to be. Whether you are a first-time buyer, looking to upgrade your family home or investing, purchasing property should be an exciting experience. Getting the right guidance and support around the different deposit options available can make a huge difference when it comes to obtaining your home loan. Book a free meeting with one of our experienced mortgage brokers today to explore your options.