When buying a house, one of the first things you will need to do is ensure you’ve got enough of an upfront deposit to be eligible for a home loan. While there’s no fixed number, having a deposit that equals at least 20 per cent of the property’s price can improve your chances of approval. Some lenders may even approve you with a lower deposit, but you’ll need to have a minimum of 5 percent of the property’s value unless you have a guarantor for your home loan.
Most lenders also require you to pay for Lenders Mortgage Insurance (LMI) if you’re borrowing with a low deposit and without a guarantor. However, certain professionals such as doctors, lawyers and accountants are considered low-risk by lenders, and the requirement to pay LMI may be waived if you belong to one of these professions. You can speak with your broker to check your eligibility for a professional discount and purchase your house sooner.
It’s also worth remembering that besides the deposit, you’ll also need enough savings to cover various other costs associated with buying a property, such as:
- Stamp duty, which could run into a few thousand dollars, depending on your state
- LMI, if you’re borrowing with a low deposit
- Building and inspection fees
- Legal fees
- Building and contents insurance
- Moving costs
Why do you need a deposit?
A home loan deposit can be understood as your initial contribution to the purchase price of your house. It helps you own a portion of your home, which reduces the lender’s risk in lending you money.
Generally, the higher your deposit, the more is your stake in the property, and the lesser risk you pose to the lender. Lenders also consider you less likely to default on loan repayments if you have a higher stake in the property.
By regularly putting aside money for a deposit, you’ll also demonstrate good financial planning and the ability to save money, which increases your credibility as a borrower.
How to save for a home loan deposit faster?
Having a 20 per cent deposit not only improves your chances of mortgage approval but also makes you eligible for competitive interest rates and discounts from lenders. A larger deposit also means you’ll need to borrow a lesser amount of money, which can make your repayments easier to manage in the long run. That being said, saving for a deposit isn’t exactly easy.
For instance, the median property price in Sydney for a unit is around $800,000. So, you’ll need to save at least $160,000 for a 20 per cent deposit and an additional $40,000 to cover the additional costs. Depending on your income and expenses, it could take you several years to put together $200,000 in genuine savings. There’s also the risk of property prices escalating in the meanwhile.
It’s up to you whether you want to wait it out and save up a 20 per cent deposit, or purchase sooner with a lower deposit by paying LMI or using a guarantor. Regardless of your decision, it’s worth budgeting and trimming down unnecessary expenses to put aside as much as you can toward your deposit. You can use the following tips to build your deposit faster:
1. Plan a household budget and review your expenses
Reviewing your expenses is one of the surest ways of boosting your savings. Once you make a budget and go through your monthly expenses, you may find memberships and subscriptions you’re no longer using. Eliminating these easily overlooked expenditures will instantly boost your savings.
Having a budget in place will also help you determine the amount of money you can set aside each month for your home loan deposit without stretching yourself too thin. This, in turn, will give you a fair idea of how long it’ll take you to reach your savings goal, as well as the amount you can comfortably repay each month for your home loan.
2. Seek help from your parents
If you’re renting, you may consider moving in with your parents or find flatmates to share your living expenses. You could even ask your parents to guarantee your home loan with the equity in their property, allowing you to borrow with a lower deposit without paying LMI.
However, do consider your repayment capacity when borrowing with a low deposit. If you’re renting, you’ll most likely be comfortable with a monthly repayment that is similar to your current monthly rental fee. Borrowing more than you can afford can make it difficult to service your loan if interest rates hike or your financial situation changes for the worse. In such a case, you not only risk losing your house, but also the home of your guarantors.
3. Take advantage of ongoing government grants and schemes
It’s worth exploring the various government schemes available to help first home buyers get into their homes sooner. For instance, the First Home Loan Deposit Scheme offers eligible first home buyers the opportunity to buy a home with only a 5 per cent deposit and no LMI. There may also be state-sponsored grants (depending on where you’re buying) you can take advantage of to boost your deposit. Some states also offer transfer duty concessions to first home buyers, which can help you save some money. It’s advisable to visit your state’s website for the latest information on available grants and schemes.
