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.
But, in today’s market, how much do you really need? Do you need a 20% deposit? Or will lenders let you in the door with considerably less?
Given the attention that has recently been paid to the banking royal commission and increased funding costs facing the banks, you’d be forgiven for thinking the answer to that last question is “no, they won’t”.
But finance specialist John Tindall, from Accumulus Home Loans in Sydney, says that “despite all lenders tightening their lending criteria, there are still lenders who require only a 5% deposit”.
You will normally need to put down a deposit that is equal to at least 5% of the sale price to buy a house. For banks, that’s usually the lowest deposit they will entertain – although many will require significantly more. A 5% deposit on a $500,000 loan equates to $25,000, which is far less than many prospective buyers imagine their deposits will need to be.
That said, “new buyers often forget that they’ll also need funds for stamp duty, lenders mortgage insurance (LMI) and professional fees such as conveyancing,” says Tindall.
Used to mitigate the risk of lending money to someone with little savings, the one-off LMI fee is generally applied to borrowers with a deposit that’s less than 20% of the purchase price.
“However,” says Tindall, “there are some important exceptions to this rule of thumb. Some high-density locations such as inner-city suburbs, commercial properties or self-managed super fund investment loans require a 30% deposit.”
The one-off LMI fee depends on the amount being borrowed.
“At 95% for a family home, LMI can add up to 5%,” says Tindall.
“This is not necessarily a bad thing if it means getting the property you want [rather than] missing out.
“In recent years, clients who have decided to pay it and secure their property have since seen values rise by over 20%. Not good if you missed out! It can be added onto the loan, meaning you have 30 years to pay it off,” Tindall says.
For a $500,000 loan with a 5% deposit, Tindall estimates LMI would cost $17,000 for residential buyers.
“Different lenders negotiate different LMI premiums and it can be worthwhile to shop around. A mortgage broker can help with this,” he adds.
In its latest budget, handed down at the start of October, the Federal Government announced an extension of the First Home Loan Deposit Scheme.
The government will fund a further 10,000 places in the scheme over the 2020-21 fiscal year to help more Australians buy their first home.
The scheme is designed to help first home buyers enter the market quicker by providing a guarantee on 15 per cent of a new home’s value. This means eligible first time buyers can potentially purchase a property with as little as five per cent deposit without having to take out Lenders Mortgage Insurance.
There are a number of eligibility criteria to access the First Home Loan Deposit Scheme include income tests, minimum age requirements, deposit tests and whether you will use the home as your primary residence.
The scheme is open to singles earning less than $125,000 per year and couples with a combined income of less than $200,000 per year.
Applicants must be Australian citizens and have not owned a property in Australia previously. You must also be buying the property as your primary residence; investment properties do not qualify for the scheme.
First time buyers accessing the scheme must be over the age of 18 and have at least five per cent deposit saved.
First time buyers need to apply for the scheme directly through their lender. There are 27 lenders currently offering places in the First Home Loan Deposit Scheme.
In the latest Federal Budget the government expanded the First Home Loan Deposit Scheme to include buyers who purchase new-build properties including house and land packages and off-the-plan properties.
Property price caps apply to purchases under the scheme, but these vary by state and territory. You should consult your lender as to whether your intended property purchase qualifies under the scheme.
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.
Which is why mortgage broker and Port Finance Group director Anthony McDonald says you need to factor in these increases when making a 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.
“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 is 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.
“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.”
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