If you're looking to buy your first home, getting a deposit together is undoubtedly one of your top priorities. The bad news (for some people, at least) is that a deposit usually requires good old-fashioned saving. But the good news is that there are some key strategies that can help you get there quicker.
A home loan deposit can be a daunting first step. Generally, banks and financial institutions will require a deposit of at least 20 per cent of your prospective property’s purchase price. So, if you want to buy a property worth $650,000, ideally you’ll need at least $130,000 as a deposit plus transaction costs.
In fact, you’ll need a bit more than that to cover all the costs of buying a house. If you are a first-home buyer there won’t be stamp duty, if the purchase price is below $600,000 in Victoria for example, but there will be other government costs, such as transfer fees and registration fees. In addition, there are solicitor fees and buyer’s advocate fees if you decide to outsource to a professional to get guidance on asset selection. Refer to the Home loan calculator to work out these costs by State.
However, there are ways to lessen the size of the deposit you need to buy a home, most notably through various government schemes and grants.
As a first-home buyer, you could potentially be eligible to receive help from your state or territory government. Each state and territory has a version of a first home owner grant (FHOG), which can form a part of your deposit.
There is also the Australian government’s First Home Super Saver (FHSS) Scheme, launched in the May 2017 Federal Budget, which is designed to allow first-home buyers to use their superannuation account to save some of the money they need for a home deposit. Under this scheme, first-home buyers make extra contributions to their super through salary sacrifice or voluntary contributions, and then withdraw those contributions for a deposit to buy or build a home to live in. There are rules around who can use the FHSS and when you can get your money out, but again, you may be eligible.
Lastly, an initiative from the Australian government called the First Home Loan Deposit Scheme, is designed to help eligible first-home buyers buy a home sooner. Under this scheme, the National Housing Finance and Investment Corporation (NHFIC) will provide a guarantee for eligible first-home buyers on low and middle incomes, so that they can buy a home with a deposit of as little as five percent. The scheme, which started on 1 January 2020, will support up to 10,000 home loans through a panel of participating lenders. Successful applicants only have 90 days to fund a suitable property or they drop out of the scheme and have to reapply. Many first buyers may find it difficult to find the right property in this 90-day timeframe. The maximum property purchase price for the scheme varies. For example, in Melbourne $600,000 is applied.
In May 2020, The Property Council of Australia proposed the ‘New Home Boost’ grant to the National Cabinet which would provide a $50k grant to buyers of newly built homes and help stimulate the building and construction industry and counter the devastating effects of the COVID-19 pandemic.
If you are not able to benefit from these schemes, it’s back to the old-school way of saving for a deposit.
“Ultimately, this is budgeting, but on a larger scale. It comes down to understanding how much your lifestyle is costing you? Suzy Wiegard, Head of Relationships at Australian Unity says.
“Start by splitting out your discretionary and non-discretionary expenses (take an average over the past 6 months of your outgoings) to help quantify your spending habits. You could setup a 7-day float to manage the day-to-day expenses if you want to ensure you are managing your money effectively as every dollar has a job to do.”
Saving depends on your resourcefulness. Here are some questions to ask yourself and look for additional ways to save:
Importantly, make sure you are not in the credit card spiral of spending more than you are earning.
“The first step on the property ladder is the hardest,” says Suzy. “We’re seeing a lot of customers who are prepared to make changes to their lifestyles, with some impressive results. The greatest rewards come from delayed gratification.”
Suzy adds that if you are making progress in your saving, you can also consider other strategies to get you on the path of home ownership.
A common strategy is to increase the loan-to-value ratio (LVR), by paying Lenders Mortgage Insurance (LMI). “Instead of an 80 percent loan, you can pay the one-off LMI charge and borrow 90 percent. That is going to afford you a better property, and you need to consider the opportunity cost of missing out on that better property. It’s a strategy that could pay-off for you in the long term,” Suzy says.
Another strategy is buying a property with another person as tenants in common. “It could be a brother and sister each paying 50:50 for a property,” says Suzy. “The idea is that together the parties have more borrowing and buying power. Maybe the siblings can afford to buy a townhouse instead of a unit. The joint venture approach could also be supported by a legal agreement that states neither party can sell in under five years to ensure both parties are on the same page.”
Another possibility is “The Bank of Mum and Dad”. Consider whether your parents or other family members may be willing and able to help you out with a one-off financial gift or interest-free loan.
Saving for a home deposit is daunting no matter which way you look at it. From applying for government schemes, to developing a budget, to thinking outside the box. But planning, commitment and persistence will help.