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Truth time: How much do you really need for your first home deposit?

June 23, 2020

There’s a generation of Australians out there that feel they’ve been locked out of the property market before they’ve even had a chance to get into it. The story goes that decades of skyrocketing house prices and increased cost of living have delivered a one-two punch to first a home buyer that has many on the mat. The heavy feeling of defeat keeps some there; convinced that the Australian dream will never come true.

Getting together a deposit is seen as perhaps the biggest challenge when it comes to getting into the housing market. The more house prices increase, the larger the deposit needed. With wages remaining stagnant and cost of living increasing, saving money has become that much harder. While many renters move in with their folks in order to get a leg up, that isn’t an option for everyone.

The trouble is catchphrases such as ‘Generation Rent’ and ‘Housing Affordability Crisis’ have convinced many that they’re down and out for the count. The assumption that they can’t buy a home has stopped them from taking measure of their opposition, doing the research to see if the fight is truly as one-sided as they think.

So let’s throw our own punch and bust the myth of home deposits. Let’s investigate much we actually need to save for a $400,000 new home.

Deposit 

According to Clarity Home Loans Managing Director Mark Edlund, a surprising number of young people assume they need a 20% deposit. In fact, the average minimum deposit you need to have available is only 5%. The need for just a 5% deposit has been the case for the past 30 years. Despite the often quoted “you need 20%” there are many financially secure people today who would not be in the position they are now if they didn’t back themselves with 5% deposit years ago.

On a $400,000 property that means a deposit of $20,000 no $80,000.

Total outlay so far: $20,000.

Stamp Duty 

This is one of the major upfront costs of buying a home. The ACT government has recognised that stamp duty can be a barrier to many first home buyers. That’s why, from 1 July 2019, they have changed the First Home Buyer Concession Scheme to expand who can take advantage of the concession.

Unlike the previous scheme, the concession now applies to vacant residential land, new builds and established properties throughout the ACT. There is no longer any upper limit on the price of the property.

If you earn under $160,000 (or slightly more if you have dependent children) you are eligible for the scheme. Note that this is the combined income of you and your partner, and both parties must be 18 years or older.

On a $400,000 house, the stamp duty would be $8,000. With the concession, it’s zero.

Total upfront outlay so far: still $20,000.

Mortgage Insurance 

Perhaps the rumour of the required 20% deposit comes from the need to take out mortgage insurance if your deposit is less than this amount.

Mortgage insurance for a $380,000 loan is about $12,600 (depending on property value: this varies significantly from lender to lender). If this is needed to be paid upfront, it would more than double what we currently have to save. Luckily, most banks will work this cost into the overall loan amount by adding it on top of the base 95% loan.

For some first home buyers, the Australian Government will contribute enough deposit to remove the LMI burden as part of their First Home Loan Deposit Scheme.

Total upfront outlay so far: Still $20,000 (using the FHLDS) or $20,630 without government assistance.

All the little ‘hidden costs’

There are a number of hidden costs to buying a home. Building reports (not applicable for a new home), legal, government and lender fees that need to be paid upfront cost approximately $3,500.

Total upfront outlay so far: $24,130 

Now getting together $24,130 might seem difficult, but keep in mind this is the cost for a $400,000 new property.

Instead, you could consider a brand new one-bedroom apartment like this one at Vincent Apartments in Denman Prospect, 15 minutes from the CBD. It’ll set you back $279,900, meaning you’ll only have to come up with $17,520.

If after reading this article you’re re-thinking your lifetime-renter status, we have even more good news for you.

Buying off the plan. 

Currently, there are several off-the-plan developments that are offering 12-month payment plans, allowing you to secure your apartment for $1000 and pay the remainder of the 5% over the course of a year.

One of the benefits of purchasing off-the-plan is that the price is locked from the day you exchange. That means that any value increase your property gains over the course of the year you spend saving the deposit is all yours. There are a number of factors to consider before purchasing off the plan. Mark Edlund, director of Clarity Financial Group , highly recommends all buyers wanting to get into the market this way seek professional advice from a mortgage broker before making that final commitment of purchasing.

Federal New Homebuyers Grant

Announced as part of the Government’s post-Covid stimulus package, HomeBuilder provides eligible owner-occupiers including first home buyers with a grand of $25,00 for new homes, including off-plan apartments. This could significantly reduce your Loan-to-Value ratio.

In summary 

Housing market conditions may have sucker-punched you, but the match isn’t over. You’ve a lot more power in your right hook than you think. There are a lot of ways to accumulate a deposit. Saving it requires work and sacrifice, but it is supremely achievable.

Thanks to record low interest rates, owning your own home in Canberra is now often cheaper than renting. The percentage of your income repaid as interest is a lot lower than it was 20 years ago, as interest rates cushion the impact of increased house prices.

Chatting to a mortgage broker for an obligation-free assessment of how close you actually are to home ownership is the first step.

Get up off the mat. It’s time to get the facts.

This article gives general information only. Purchasers needing specific details should consult their own lending specialists. We highly recommend a mortgage broker like Clarity Financial, whose services are free to buyers.​