It’s no secret that it’s getting harder and harder to achieve the great Australian dream of home ownership, especially if you’re trying to enter the market for the first time.
Getting that elusive deposit can seem like a dream that’s forever out of reach when you’re starting out saving from scratch. Yet, it is possible to get out of the rental trap. And it doesn’t always require you to move in with the in-laws, survive on a shoestring budget or save diligently for a decade to achieve it.
So what are your options when it comes to getting a deposit to buy a home? In this article we discuss the key information you need to know, share some tips and insights, and explain the two main ways to go about it, including a proven strategy that is guaranteed not to disrupt your lifestyle.
How long does it take to get a deposit?
If your strategy is saving, the length of time it takes to get a deposit depends on how much you earn, how much you spend and how much of a deposit you require. If you have a good income, can reduce your expenses and are able to put aside a decent amount each week, this may be achieved in a couple of years. However, if you’re paying rent and supporting a family, saving enough for a deposit can take decades. There is another option available to hardworking Australians, which involves leveraging your super – and if you qualify for this investment strategy, you may be able to access a deposit in a matter of weeks.
Working out how much you need
It’s important to do some calculations early on to work out what you need. To get a clear idea on the amount of deposit required, you’ll need to know the cost of the home you are hoping to buy, the fees and charges that will apply to the sale, and what you can afford to borrow and repay.
Why a larger deposit will ultimately save you money
A good rule of thumb is to aim for a house deposit that equates to 20% of the purchase price of the home. While some lenders only require a 5% deposit, a smaller deposit means a bigger loan—and on top of this, you’ll have to pay for lender’s mortgage insurance.
What is lender’s mortgage insurance?
Lender’s mortgage insurance (LMI) is usually payable if your loan-to-value ratio (LVR) is higher than 80%. The LVR represents the amount you are borrowing as a percentage of the value of the property you are buying. The LMI protects the lender if you fail to make repayments, but offers no protection to you or your guarantor (if you have one). It can be paid as a one-off payment on settlement or added to your loan, but this option will attract interest. The cost of LMI can be up to $17,000, depending on the size of your loan and your LVR. If you can raise a deposit of 20% to put towards your new home, you will avoid paying the LMI and save yourself thousands.
So, how do you get a house deposit?
When it comes to getting a deposit to buy a property, what are your options? Below we explain two quite different ways you can go about it. It’s important to note that you should seek independent financial advice and consider your personal circumstances before making a decision on the right strategy for you.
Option 1: Knuckle down and save
This is the traditional method, however, rising house prices are making it increasingly challenging to raise a deposit this way. To succeed, it requires discipline, strict budgeting and regular saving. Depending on your income, you may be able to do this as you are also paying rent, but for most, this strategy requires significantly cutting back on expenses. This may mean moving in with your parents, in-laws or friends to reduce the amount you pay in rent and/or cutting back on your everyday spending, from looking for bargains in the supermarket to pausing subscriptions like pay TV that are nice to have but not essential. To give your savings a kickstart, you may even consider selling any valuables you no longer need.
Option 2: Leverage your super to access a loan
An alternative option that many people don’t know about is to leverage your superannuation to access a loan to create a 20% deposit. To be clear, this does not mean using your super to pay for your deposit. Instead, it involves setting up a self-managed super fund (SMSF) and taking control of your super and how it is invested. Through our Home Buyer Accelerator Program, when you set up an SMSF you have access to our exclusive second tier lenders, which enables you to invest in a property trust and access a loan to use for a deposit. As part of the program, our team take care of the management of your SMSF, including investment strategies and admin and reporting requirements, as well as providing expert advice on buying the right home in the right location for you.
What about government assistance?
Depending on your circumstances and where you are building, you may be eligible for government assistance such as the First Home Owner Grant. If you are eligible, you can access the First Home Owner Grant while also leveraging your super to create a deposit, which makes a big difference.
Another form of assistance for first home buyers is the First Home Loan Deposit Scheme. This allows eligible first home buyers to purchase a home with a 5% deposit without needing to pay the LMI. Keep in mind that you still need to have a deposit to proceed, and by paying a smaller deposit, you will be left with a larger loan to repay, which will likely mean higher repayments. As with all of the above options, be sure to seek financial advice and assess your circumstances to confirm you are able to pay out the remainder of the loan before you proceed.
Take the first steps today
If you are stuck in the rental cycle, it can feel impossible to break free. But the good news is, there are options that can help you achieve the dream of home ownership, even if you are unable to save enough for a deposit.