The short version
- Lenders want to see genuine savings, built up over three months or more.
- The First Home Super Saver Scheme lets you save inside super, with tax savings.
- With the 5% Deposit Scheme you may need far less than 20%.
Looking to buy your first property? It's an extremely exciting venture for anyone, but with prices as high as they are in Australia, it's also extremely challenging to save enough money for a deposit on a property that isn't a garage or in the back-end of woop-woop.
Even so, getting on the property ladder has been the single best way to build wealth for most Australians over the past few decades. Read on for our guide to saving up for a deposit on your first home loan.
Case study
To fully understand the strategies outlined in this article, we will make use of a case study.
Jack and Diana, both in their late twenties, have recently married. They were previously living in an apartment block with noisy neighbours. They want to settle down, buy their own home and in the near future, start a family.
They have started to look around and have found places that could be their potential dream home. Between them, they have saved $180,000.
They continue to look around at homes and find just what they're looking for. A beautiful home in a serene neighbourhood in Brisbane.
The house costs $880,000. They have calculated that for a 5% deposit they will need $44,000. Alternatively, they would need $88,000 or $176,000 for a 10% and 20% deposit, respectively.
They do some further research and find out that if they put down a 20% deposit, they avoid paying lenders mortgage insurance (LMI). They aren't sure whether they should use all their savings for the house deposit, so they decide that they should speak to a broker who advises the following.
Strategies to save for a house deposit
Saving for a house deposit requires a disciplined mindset and some crafty investing.
Work hard to grow your genuine savings
This may seem like a straightforward strategy, but it's by no means easy. Make a concerted effort to put a certain percentage of your salary every month into a savings account. It's important to avoid tapping into it.
You'll see your money grow toward your dream home. Saving up this way is much easier if you have a partner saving alongside you.
Genuine savings is a term used by lenders to define the amount of money saved by yourself over a certain period. This gives the lender an idea of your financial habits and, ultimately, your ability to make loan repayments.
Earn extra money outside your job
Is your day job not allowing you to earn enough to grow your savings? If it isn't, earning extra money through passive income may be the solution.
With some initial effort and capital, you can make your money grow while you sleep.
Save money by reducing lifestyle spending
A key strategy is to cut down on your spending.
Initially, this may be difficult. But if you keep the big picture in mind, you'll find it easier to cut back on spending - you want to build a future for yourself and your family.
First Home Owner Grant and the 5% Deposit Scheme
When saving up for your first home, government help can make your deposit go further.
The First Home Owner Grant is paid by your state or territory government, and in most states it's now only available for newly built homes, up to a price limit. The government's 5% Deposit Scheme doesn't add to your deposit, but lets you buy with a 5% deposit and no lenders mortgage insurance, as long as the home is under the price cap for where you're buying.
Gifted deposit from parents
Gifted deposits or inheritances can be approved as genuine savings and used for a house deposit. Usually, the deposit will have to be between 15-20% to bypass the genuine savings rule.
Pulling money from your super
While some home buyers can use their super to buy a property, you can't exactly use your super fund for a house deposit. But, you can make use of the First Home Super Saver Scheme (FHSSS).
Through this scheme, you can make voluntary concessional (before-tax, taxed at 15% in the fund) and non-concessional (after-tax) contributions into your super fund, then withdraw up to $15,000 of them a year, and up to $50,000 in total, for a house deposit.
Have an investment strategy
Having a varied investment portfolio could help you save up for your dream home in a shorter time. You don't simply have to keep your house deposit in a savings account.
The issue with this may be that the housing prices appreciate quicker than your savings account gains interest. Investing in shares could provide a higher return on your money, but it is not without risk since stock markets are inherently volatile. Investing in an index fund or ETF — both diversified types of investment — is less risky but doesn't remove it entirely.
Borrow your deposit
If you don't have the time to save up, some people use a personal loan towards a house deposit, but most home loan lenders won't accept a borrowed deposit, and the repayments will reduce how much you can borrow. Lenders will look at your credit history and other financial habits, so your financial history must be in order.
What lenders want to see (in regards to your deposit)
To take out a loan for your house deposit, you will need to provide an adequate financial history to lenders. This means you will have to show bank statements (usually from the past three to six months) indicating a healthy balance.
Lenders look at genuine savings. As mentioned previously, ''genuine savings'' is money that you've personally saved over some time and have maintained.
What wouldn't constitute genuine savings, you ask? This would be money that was gifted to you by family members or that you received by selling assets like a car. It all depends on the lender's criteria. Overall, lenders use genuine savings as an indicator of your financial habits.
Closing thoughts
Saving up for your first home purchase is much easier with the right planning. Take your planning a step further, and don't just save for your deposit, but also the costs that come with owning and maintaining your first home. You'll be a homeowner soon enough with the correct strategy and a determined mindset.