For a lot of us, building or owning our own home is a key life goal. And, while it has its ups and downs like any investment market, the property market has a great track record of performing strongly over many years.
If you’re looking to get your foot into the property market, there’s one burning question that is often asked: “How much deposit do I need for a house?”
The short answer is that you can start with a house deposit of as little as 5%. However, generally, it is recommended that you have a minimum house deposit of 20% of the purchase price. If you are starting with this house deposit amount, it means you can avoid some additional costs in your mortgage, but more about this later.
Let’s delve into this a bit deeper into how much deposit for a house is needed, as there are lots of factors involved. To start with, most banks will finance home loans of up to 95% of the purchase price. Meaning you only need to have a 5% deposit. However, these loans are dependent on your ability to prove your employment history and savings record. Every bank is different, so it’s worth shopping around or using a mortgage broker who can compare different loans for you. If you’re in a field like freelancing or are self-employed, it can be hard to get a traditional loan. In this case, it’s worth knowing that there are always specialist mortgage brokers you can turn to.
Whether you are buying a small unit or a large house, the answer is a resounding yes. The bigger the house deposit amount you have, the better off you are going to be. This is because the more you have saved, the stronger your position is in showing you can live well within your means, put money aside and can be relied on to make repayments or have the ability to make higher repayments.
An additional benefit is that the higher the house deposit amount you have saved, the less you have to borrow against the property. This means lower repayments and less interest paid over the life of the loan.
The magic number for a deposit is 20%. We mentioned earlier that if you have a higher house deposit amount, you can save on additional costs related to your mortgage. This is Lender’s Mortgage Insurance (LMI). If you have under the magic 20% house deposit, you’ll have to pay LMI as part of your repayment. According to Canstar, there’s a lot of confusion in the market about LMI, so they provided the following explanation:
“…[Lender’s Mortgage Insurance is] an insurance policy that protects the lender from financial loss in the event that the borrower can’t afford to keep up their home loan repayments. The financial institution may make it a condition of borrowing that you pay for a lender’s mortgage insurance policy.”
How much this insurance costs depends on your individual circumstances – such as the actual house deposit amount you have. It is usually factored into your repayments so it’s not an up-front cost, but it is a cost none the less. So if you can avoid it, you’ll be better off in the long run.
Even if you’re aiming for a house deposit on the smaller side, there are some financial incentives to help out.
First home buyer grants and concessions are available and vary by state or territory. But what’s great news is that they are largely geared towards new home buyers. There can be various grants available for buying off the plan or building from scratch and these can help you boost the house deposit amount you have saved.
In addition to this, first home buyers can be exempt from Stamp Duty tax, which can be quite a saving and, as a flow on effect, potentially increase your house deposit amount!
The Australian Government has proposed a new scheme that allows first home buyers to save a house deposit within their super fund. Saying that, this could boost savings by up to 30% towards a first home. You can check the Treasury website for further updates.
To learn more about what first home owners grant you could receive, click your state below:
In the Federal Election in May, the Government also floated a scheme where first home buyers can buy with a house deposit amount of 5%, and the government would guarantee the remaining 15% to make up the magic 20% to avoid LMI. Once again, check the Treasury website for further details on this.
You should also budget for some extra costs on top of your house deposit amount. The biggest one is Stamp Duty, which may not apply if you’re a first home buyer. If you’re building a new home, you can avoid building and pest inspection costs; otherwise, you’ll need to factor these in. You’ll also need to budget for a solicitor, it can save a lot of stress and problems throughout your buying journey. Keep these extra costs in mind, as you will need to have money to pay these in addition to your house deposit amount.
If you’re looking to build a new home, get in touch with your local G.J. Gardner team for a chat or consultation, the coffee’s on us!