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Truth Time: How much do you really need for your first home deposit?
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 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 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.
The average minimum deposit you need to have available is only 5%. According to Clarity Home Loans Managing Director Mark Edlund, a surprising number of young people assume the deposit is up to 20%. On a $400,000 property that means a deposit of $20,000 not $80,000. 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.
First home buyers in the ACT are eligible for a $10,000 first home owner’s grant if they purchase a new or heavily renovated property.
Total upfront outlay so far: $10,000.
This is one of the major upfront costs of buying a home, and is slashed to just $20 for first home buyers if you earn less than $160,000 per year and the home you’re buying costs less than $455,000. This is a saving of more than $11,000.
If your first property costs more than $455,000 you’re still eligible for deferred stamp duty. You will have to pay it eventually, and with a below market rate interest applied, but you have 10 years to do so. Deferred stamp duty also increases your deposit, and lowers your mortgage insurance premium (if applicable) because you have a larger deposit to contribute, potentially saving you thousands.
Some new home purchases are also eligible for discounted stamp duty, which means even less that you need to pay in the long run. Given the rate of property appreciation, your best bet is always to get into the market as soon as possible. If the cost of stamp duty is all that is putting you off, even with the interest rate, deferring stamp duty is a good move.
Total upfront outlay so far: $10,020.
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 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.
Total upfront outlay so far: Still $10,020.
All the little ‘hidden costs’
There are a number of hidden costs to buying a home. Thankfully, many of them can be built into your loan. 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: $13,520
Now getting together $13,520 might seem difficult, but keep in mind this is the cost for a $400,000 new property.
There are one-bedroom apartments for sale for as low as $242,400 at Southport, Greenway. With the $10,000 first home owner’s grant factored in and the stamp duty concessions, the total upfront outlay for one of these is only $5640.
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. You won’t get the first home owner’s grant until settlement, so you’ll need to save the full 5%.
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.
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.
This article gives general information only. Purchasers needing specific details should consult their own lending specialists, which we highly advise. The way your mortgage is structured could save you thousands. Most individuals compare interest rates, but a mortgage broker can also compare various fees, credit policies, loan products and mortgage insurance premiums and they’re a free service.
Get up off the mat. It’s time to get the facts.
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