Saving enough money for a home deposit is the holy grail for first-home buyers.
Often the culmination of years of squirrelling away every spare dollar you earn, reaching that target amount is no small achievement, particularly with house prices soaring in most Australian cities.
But in today’s market, how much do you really need? Do you need a full 20% deposit, or will lenders let you in the door with considerably less?
Here’s what you should know.
How much deposit do you need before approaching a bank?
Contrary to what you may have heard, you don’t always need to save a 20% deposit before the banks will talk to you.
Mortgage broker and Port Finance Group director Anthony McDonald says banks are prepared to offer loans to buyers who have much less than a 20% deposit – some as little as 5%.
On a $500,000 loan that 5% deposit is only $25,000, but you’ll also have to pay lenders mortgage insurance, which the banks use to mitigate their risk of lending money to someone with little savings.
McDonald says mortgage insurance generally applies to borrowers who have less than 20% of the purchase price, and the insurance costs can be significant.
“Mortgage insurance can go up to about 2% to 2.5% (of the loan amount) when you get up around that 90% (borrowing) mark. At that point it starts to become cost prohibitive because you end up adding it to your mortgage and it becomes very costly over the journey,” he says.
“Say you borrow $500,000, it might be 2% mortgage insurance, plus the stamp duty. So it might be $10,000 to $12,000 that you’re adding on to your mortgage.”
Is a first-home buyer better off saving for a bigger deposit?
Of course, in today’s rapidly changing markets, waiting a few extra months to save additional money to avoid paying mortgage insurance might mean that the properties in your price range increase in value by much more than the cost of the insurance.
McDonald says you should factor those increases in when making your decision about when and how much to borrow.
“Sometimes it’s better for the customer to go into a property and pay that insurance, knowing that by the time they try and save that money to avoid paying the mortgage insurance, the market’s moved another 10% or 12% and they’re actually behind even further,” he says.
What other costs are buyers charged?
You will need to factor in other costs such as stamp duty which can vary from state to state. Picture: Getty
Depending on which state you’re buying in and the price of the home you’re purchasing, first-home buyer concessions can shave off many of the extra costs normally associated with buying a home.
In Victoria, there’s no stamp duty payable on any property purchased up to $600,000, and a sliding scale of concessions on properties valued between $600,000 and $750,000.
For homes worth $750,000 and above, you can expect to pay duties of around 5% of the purchase price – that’s $40,000 on a $750,000 home. Of course, that extra cost can be capitalised (added onto your overall loan), but it will also slightly increase how much you need to borrow, and thus how much of a deposit you need.
McDonald says there are also other, smaller, fees, for things like conveyancing and title transfers.
“They might add up to around $2500 for a first-home buyer,” he says.
Different banks have different lending requirements
Each bank has its own set of rules and standards.
McDonald says your personal financial situation will determine how flexible most lenders will be.
“The more you can give the bank, the better, because the less interest you’ll pay. But it does just come down to individual circumstances. How good’s your income, how long have you been in your job? You might have just got a good pay rise, so you can afford to make those repayments,” he says.
“The rates and fees are what they are. It’s just a matter of mining through the options to get to the loan that suits your needs.”
