Your home loan deposit will be the biggest upfront cost when purchasing a home, but how much do you need and what’s the best way to save?
The phrase “saving for a deposit” would almost have you believe that the deposit is all you need when you purchase a home. Even though it usually makes up the largest portion there are a number of other costs you need to factor in.
Amount you need to save = deposit + stamp duty + legal costs + inspections + loan fees + adjustments at settlement
The deposit amount can vary. As a minimum most lenders will require a minimum deposit of 5% of the purchase price. So for a purchase of $400,000 a 5% deposit would be $20,000.
Stamp duty is a state government tax that is levied when assets are sold. It varies state by state so to get an idea of how much it will be use an online calculator like the one here.
For example if the purchase was a $400,000 property in NSW, stamp duty would amount to $13,490.
Other government fees include mortgage registration and transfer fee. An estimate of these are included in the calculator above. For the above example they add to $329.
This is the cost of your legal representation in the purchase. Generally a solicitor or conveyancer will be used or you can do it yourself. They check and advise you on the purchase contract, do the necessary checks to ensure all is in order and liaise with the lender and the seller to arrange for the purchase to take place. It generally costs anywhere from $1,500.
To ensure that there are no issues with the property that you are unaware of, your legal representative will often recommend that you get an independent inspection done by a qualified professional. A pest and building inspection is generally carried out. This may cost anywhere from $500.
Home loans will have varying setup fees from none at all, to a valuation fee of around $300 to an application fee of approximately $600. When comparing home loans, ensure that you determine how much this will be for each loan you are considering.
Adjustments at settlement
When you purchase a property, there will be certain things that the seller will have paid for in advance. An estimate is made of the proportion of council rates etc. that belong to the purchaser and these are included in how much the purchaser needs to contribute at settlement. Your solicitor will advise you how much this will be prior to settlement.
Did You Know?
Lenders mortgage insurance (LMI) is a cost that is passed onto the borrower if they are lending more than 80% of the value of the property. It is not usually paid upfront but instead added to the loan amount and can add to thousands of dollars. This means that the loan amount will be increased and so will the repayments. So for example if you have a 10% deposit and thinking you will lend 90% of the value of the property, when mortgage insurance is added it could take it to 92%. To find out more about LMI click here.
When it comes to choosing how much to save for a deposit there are a couple of percentages you need to keep in mind.
More than a 20% deposit
A 20% deposit will enable you to borrow 80% of the value of the property and thus avoid mortgage insurance. When you borrow this amount or less, the lender considers your loan a low risk and so you may qualify for some of the lowest interest rate loans.
Less than a 20% deposit
Some borrowers find it daunting to save enough for a 20% deposit as well as having funds to cover the other costs above. It could mean putting off their home ownership dreams for years until they have saved this amount.
Luckily home buyers can opt to have a deposit as low as 5%, which enables them to get into the property market sooner. This does not come without costs though including lenders mortgage insurance and higher interest rates.
When your deposit is less than 20%, lenders mortgage insurance is usually passed onto the borrower and can amount to thousands of dollars. Interest rates on home loans can be tiered, with the cheapest rates offered to borrowers with a 20% deposit, with higher rates applying between 80 – 90% of the property value and the highest rate for loans above 90%.
Mortgage insurance is an insurance that protects the lender in case you default. It is lender specific so can vary. If you have less than a 20% deposit, ask different lenders for a quote on how much it will be. It can also jump at certain percentages, namely at about 89% and 91%. If you contribute a bit more and bring the percentage down by as little as 1% you may save almost that amount in mortgage insurance.
So the amount of the deposit will depend on how quickly you want to get into the property market and how keen you are on avoiding the extra costs associated with a deposit of less than 20%.
If you have savings of less than 20%, there are other ways to avoid mortgage insurance. Getting a gift or security guarantee from a family member are two of these. To find out more read our article “Gift v’s guarantor: Which is a better option?”
Don’t forget to factor in a buffer
Most people have an emergency fund and this can form part of your savings. When you are calculating how much deposit you need, don’t forget to work out how much you need to hold back so that you can maintain this type of buffer.
With your deposit savings, you are probably quite used to having money in the bank that can be used if unexpected things crop up. If when you purchase, you deplete this to virtually nothing, you may feel vulnerable and could face financial difficulty if something unanticipated crops up. It can also be useful to have some spare cash when you are getting used to making home loan repayments.
Did You Know?
If you are borrowing more than 85% of the value of the property, many lenders will want to see savings statements for 3 months as evidence of genuine savings. By showing you can save, the lender is more comfortable in your ability to make loan repayments when the time comes. You need to show you have saved 5% of the purchase price and it doesn’t include funds from the sale of an asset, tax refunds or gifts unless they have been held in a savings account for at least 3 months. To find out more click here.
There are a number of reasons why saving for a deposit of 20% or more can give you a significant advantage:
No Lenders Mortgage Insurance: Lenders Mortgage Insurance is a one-off payment that lenders charge borrowers who borrow more than 80% of the property’s value. This fee is to protect the lender if the borrower was to default. If you have a deposit of 20% or more, you are considered ‘low risk’ and will avoid this cost.
Read more about Lenders Mortgage Insurance here
Competitive interest rates: The less you borrow from a lender, the less risk you are to them. This means that lenders may offer you a lower interest rate.
More home loan options: A larger deposit may also mean that you will have more flexible options available. You may qualify for more loans with extra features.
Reduced repayments: The more you save upfront, potentially your loan amount will be lower. This can mean that your repayments may be more affordable.
Ability to refinance: If you borrow less than 80% of the value of the property, then if a more competitive loan comes along with a lower interest rate and interest saving features, you can switch loans without having to factor in the cost of mortgage insurance.
Higher interest rates: As you will most likely be considered a high risk borrower with a small deposit, lenders may charge a higher interest rate.
More fees: If you are borrowing more than 80%, you may be charged Lenders Mortgage Insurance, which can add up to thousands of extra dollars.
Less flexibility: If you do not have a lot of money saved, it may mean that you will not have as many home loan options available to you. Lenders may only offer a no frills, basic home loans without the extra features.
High costs to refinance: Lenders Mortgage Insurance is lender specific and levied each time a loan is taken out with a new lender or increased with your current lender. This means that even if you would benefit from a lower interest rate by refinancing, the cost of mortgage insurance may outweigh these benefits if your loan is still more than 80% of the value of the property.
Guarantors to consider: If you get the help of family members to assist with a gift or guarantee, you may be under an obligation to them. If they want to sell their property or remove the guarantee for any reason it may make it difficult to keep the property.
In order to help first home buyers get into the property market sooner, the Government has a First Home Owner Grant (FHOG) scheme. It’s a one-off tax-free payment for people buying their first home in Australia. In recent years these have generally been wound back and if they still apply, relate only to the purchase of a newly constructed property.
State by state guide
To see if you are eligible or to obtain more information, please click on the link for the state or territory you want to purchase a property in.
Use a savings account
Using a high interest savings account specifically for your home loan deposit not only means you will earn money in interest, but it will be separate from your other accounts and won’t be tempted to spend it.
Reduce unnecessary luxuries
If rate rises occur during the fixed rate period, you will be protected from them. This could save you a significant amount in interest during this time.
Have a second income
Working a couple of nights a week at a supermarket or weekends at a café can help boost your savings quickly. An extra few hundred dollars a week can make all the difference in reaching your deposit goal sooner. Garage sales or selling items you no longer need online can also generate extra cash and boost your savings.
Negotiate your rent
Rent is probably going to be your biggest expense, so why not try and reduce it. You could try negotiating with the landlord if you are prepared to sign a longer lease. Depending on the area you live in, you may find that the landlord is eager to secure a long term tenant. Consider on halving the cost by sharing with someone else or move to a cheaper property or location.
Move back with family
If you are currently living by yourself, you may be struggling to cover expenses and save at the same time. Moving back home can reduce your expenses significantly. While it may be difficult to move in with family or friends, just keep the big picture in mind. Home ownership may take a little while, but the payoff is worth it.
Credit cards, personal loans and car loans can really eat into your income. By reducing this debt as much as possible, not only will you have more money to put towards your deposit, but when it comes time to apply for a home loan, you will be considered a lower risk borrower if you have less debt.
Our Lending Specialists can also work with you one-on-one to help you get into your own home sooner. Give our friendly team a call today on 13 72 62 or leave your details here and they will contact you.