Want to buy your first home but worried about the size of your deposit? We explore exactly what you’ll need to get a home loan and why it might not be quite as much as you think.
The starting point: the value of the property
As a starting point, the amount of any deposit you need will depend on the value of the home you intend to buy. That’s because banks are usually only prepared to lend a certain percentage of a property’s value – known as the loan-to-value ratio (LVR). In other words, the more the home is worth, the bigger the deposit you’ll need to purchase it.
Do you really need to save 20% as a first home buyer’s deposit?
A lot of first home buyers are under the misapprehension that they’ll need to save 20 per cent of the purchase price of their home before they’ll be able to get a loan. But that’s simply not true. Many lenders will allow you to buy a home with as little as five per cent deposit, meaning they’ll lend you up to 95 per cent of the property’s value. In return for this, however, they’ll generally ask you to take out lenders mortgage insurance or LMI. So, if you choose to go down this path, you should factor in the cost of LMI when calculating your monthly repayments.
Using a guarantor as a first home buyer
If you don’t want to pay LMI but don’t have a 20% deposit, there is another alternative: using a close family member to act as guarantor. A guarantor is someone who puts up the equity in their own home as security against your loan. This gives the bank extra assurance they’ll be able to recoup their money if you can’t meet your mortgage repayments. That said, if you default the bank will also have the ability to sell the guarantor’s property, so it’s not something anyone should undertake lightly. A guarantor doesn’t necessarily have to guarantee the full amount of your loan. They can put up equity to cover just part of it – say to the 20% threshold so that the bank doesn’t require you to take out LMI.
Accessing the First Home Owner Grant (FHOG)
Most state and territory governments operate a First Home Owner Grant (FHOG) scheme that provides a one-off payment to first home buyers purchasing a home, as long as it’s new or off the plan and below a certain threshold. Lenders usually allow you to count this money – which ranges from $7,000 in the Australian Capital Territory to a massive $20,000 in regional Victoria – towards your deposit. Effectively that means you need to save less. And, if you live in the Northern Territory and purchase newly built home or build one yourself, you may even be entitled to receive an additional $20,000 – although this incentive is limited to the first 600 applications.
Stamp duty and other upfront costs
On top of this, most state and territory governments also offer stamp duty concessions or even waive it altogether for first home buyers purchasing homes below certain thresholds. Stamp duty is usually the most significant upfront cost you’ll face when buying a home other than the deposit. And it’s something you need to pay for out of your own funds – you can’t usually ask a bank to lend you the money. So, having this expense taken off your hands can make it much easier to save the deposit you need to purchase your new home.
Adding it all together…
All of this means you may be able to purchase a home for a much smaller deposit than you think. Say, for instance, you’re looking to buy your first home in New South Wales and it’s a newly built home that costs $550,000. The amount you need to save for a deposit could be: 5% x $550,000 = $27,500 First Home Owner Grant – $10,000 = $17,500 deposit required or around 3.2% of the purchase price. Alternatively, if you look to purchase a new build property for the same amount in regional Victoria your deposit could be even less: 5% x $550,000 = $27,500 First Home Owner Grant – $20,000 = $7,500 deposit required or less than 1.4% of the purchase price. In short, this means that far from needing to save a 20 per cent deposit, you could potentially get into your first home with very little deposit at all.
This article was originally published on
23 Oct 2019 at 12:14pm
but has been regularly updated to keep the information current.