If you are looking to purchase your own home, you may be wondering how much you need to save. House deposits, upfront costs, guarantors, and government grants are all determinants that vary significantly depending on the state you live in. Grasping these factors can give you a better understanding of the amount required to purchase a home.
How much to save for a house deposit?
Generally, the Big 4 banks provide home loans with minimum deposits of 10%. The big 4 banks recommend a home loan deposit of 20% to reduce the additional costs that are imposed on the borrower.
For example, you are borrowing $400,000. The bank requires a minimum 10% deposit meaning you need a deposit of at least $40,000 to buy the property. Banks recommend a deposit of 20% meaning you should aim to save $80,000 to purchase your house.
The big 4 banks provide borrowers with added security knowing that their money is safe in the hands of a large institutional lender.
To remain competitive with the big 4 banks, it is not uncommon for smaller lenders like Macquarie Bank to provide low minimum home loan deposits of 5% to 10%. Loans with smaller minimum deposits are typically coupled with higher interest rates and additional costs.
Banks recommend a deposit of 20% down as it can save you from paying lenders’ mortgage insurance. Mortgage insurance is used to protect lenders if a borrower defaults on their mortgage.
If your deposit is less than 20% of the house value, you are required to pay mortgage insurance. Once your mortgage repayments have paid at least 20% of your house’s value, you are no longer required to pay the insurance.
Upfront costs
When you are saving to purchase your first house you need to consider the upfront costs. Stamp duty is a government tax that varies from state to state and is generally the largest upfront cost of a property. Stamp duty can cost over 5% of the property’s value, depending on the state.
On top of stamp duty, you may need to pay upfront costs like building and pest inspections, legal costs, and additional fees. All things considered, you can expect to pay 5%-10% on upfront costs alone, although they vary from state to state.
For example, for a house worth $400,000 you may need to pay $20,000-$40,000 on upfront costs alone. Upfront costs can be significantly reduced with government grants like the first home owners grant.
Guarantor
A guarantor is a person that helps a borrower secure a home loan by adding reassurance to the lender that home loan repayments will be made.
A guarantor provides the bank with equity in their own house to pay for the deposit. If the borrower cannot repay the loan, it becomes the responsibility of the guarantor to pay the debt. Using a guarantor can be risky so banks typically only accept a guarantor that is of close relation, such as your parents.
Borrowing with a guarantor offers you the ability to borrow from the bank with no deposit on your home loan. A guarantor can help a borrower meet the 20% deposit required to avoid paying mortgage insurance.
For example, the borrower only has enough money saved for a 10% down payment. A guarantor can provide equity in their home to meet the 20% down payment for the borrower’s home. This can save the borrower thousands of dollars from avoiding mortgage insurance.
First Home Owners Grant
The first home owners grant is a one-time payment of $10,000 to $20,000 from the government that makes purchasing a first house easier for Australians.
The grant also provides a sum of benefits including only needing a deposit of 5%, paying no stamp duty, and paying no lenders mortgage insurance. The first home owners grant can significantly reduce upfront costs by thousands, leaving more money in your pocket.
To learn more about the first home owners grant, visit: First Home Owner Grant (FHOG) Guide | One Click Life
How can you save for a house?
The first step to buying a house is understanding home much you need to save. Let’s say you are a first home buyer that is eligible for the first home grant, and you are buying a $400,000 house.
You are looking to save a 5% deposit and expect the upfront costs to be 5% as you aren’t paying stamp duty. Your goal is to save $40,000 to purchase your house.
With your goal set in place, here are 4 ways you can save money toward your house deposit:
- Live with your parents or friends: If you are spending a significant part of your income on rent each week and find it difficult to save, you can consider moving back in with your parents or friends. This will give you an opportunity to save more money to purchase your own house.
- Track your spending and remove unnecessary spending: Tracking your spending gives you an understanding of where your money is being spent and where you can cut spending on unnecessary items.
- Reducing existing debts: Reducing your personal debts such as a car loan or credit cards can free up money to be saved for your house. It can be beneficial to sell or get rid of items that incur debt as you pay less interest over time and banks are more likely to accept your loan application.
- Choose the right savings account: Choosing a savings account with a competitive interest rate means your money can grow while you save. If you are looking to save your money over a longer period of time, term deposits can also be considered.
For more advice on saving for a house, visit our previous articles:
So, this is all the common terms and questions regarding mortgages. But, if you still need help, book a meeting and have a chat to us about it.
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