First Home Buyer's Guide
Raising the deposit (and the minimum you need)
Why do I need a deposit in the first place?
Good questions! As late as 2009 St George was one a several mid-size banks offering a 100% first home loan. But how things have changed.
If you don’t need a deposit for a car loan (and the car drops in value the minute you drive out of the dealership) why do you need it for a house?
It’s complicated is the answer. But generally speaking (and I mean very generally) if you can’t raise a deposit you are statistically less likely to be able to repay your mortgage. How much less likely? Nobody really knows.
Not much more is probably the answer and in our opinion a lot of what is going on when it comes to first home buyers is as much about PR and politics that good genuine lending practices.
But isn’t it irresponsible?
Is it less responsible than allowing a first home buyer to borrow against mum & dad’s property in order to borrow 105% of the price? Responsible lending goes well beyond a simple raising of the deposit.
Didn’t it cause the GFC? (Global Financial Crisis of 2007/8)
Absolutely not. A broken poorly regulated American banking system and a completely different property liability structure did the damage. By all accounts the Australian market performed very well and if any one group of Australian borrowers was at risk of bringing down the market it was overcommitted property investors.
So how much do I need then?
When it comes to most banks and most people, the 5, 10 & 20 rule is what you need to know.
This is typically the absolute minimum most lenders will allow you to contribute.’Squeaky clean’ is the sort of applicant you’ll need to be if you plan on borrowing 95% of the purchase price.
Remember you’ll also need to cover purchase costs, transfer duties and Lender’s Mortgage Insurance.
Example of additional funding required to purchase $450,000 established property in QLD
This is the threshold that some lenders will relax their ‘genuine savings’ policy. You’ll still need to factor in purchase costs and transfer duty (if applicable) but the LMI will be roughly 30% - 40% less.
This is the magic number in Australian lending. When you borrow 80% or less of the purchase price two big things happen:
1. You don’t need to pay Lender’s Mortgage Insurance (LMI)
2. Lending criteria generally gets easier
Independent of the amount of deposit is the ‘genuine’ nature of your savings. That is, did you raise the deposit in a way which demonstrates behaviors which would predict that you will also be a good borrower.
In other words, have you either worked hard to raise the funds over at least 3 months OR if you already have the funds, did they come for a legitimate source (mum and dad rather than a personal loan for example) and have you held them for at least 3 months without burning a hole in your pocket.
Short of savings? See post borrowing without a deposit.
Raising the deposit
Deposits are typically raised the good old fashioned way by spending less than you earn and squirrelling it away somewhere you can’t get easy access to it.
The reality is it is harder than ever to raise it. Costs of living, astronomical rent and societal expectations around everything from what you wear to where you eat are all taking a toll on first home buyers’ ability to get their fist nest egg together.
A modern solution for a modern problem
So what’s the solution? Categorise, divide and automate:
Setup different bank accounts for different reasons and have your employer split your wages to each of them.
Bills: work out all your bills and have that amount go in first
Savings: What’s your savings goal? Put that amount here every month and don’t touch it
Rainy Day: 5 to 10% of your income should go here because trust me you’ll need it
Spendings: What have you got left over? This is what you have available to spend on fun, fashion and frivolity!
Now you know what you have for spendings work out what you can live without and what you can’t. Like avo on toast (I do!), great! Use the work coffee machine then.
Use technology. Now that you’ve got your budget automated, look for other ways to maximise your dollars. Apps like acorns takes the spare cents in every transaction and invests it for you.
Track and learn. There are loads of great apps like XXX and XXX to help you stay on track with your finances by giving you real time gamified analytics on your spending habits and where your money goes. They’re surprisingly obsession building and fun.
How much is right for you?
That really depends. For some, raising more deposit means wasting less money on LMI and for others LMI is a reasonable cost which is worth paying in order to get on the property ladder bathe in the currents of capital growth.
What’s the best way to raise your deposit.
Here are some legitimate ways you can raise the collateral you need to get a loan for your first home: