How Much Do You Really Need For A House Deposit?
So how much do you really need for a house deposit? When I first seriously started thinking about buying a house I had no idea where to start. I knew you got a loan and then paid it off. I knew how to look for houses that I liked. I had been “house window shopping” for years already, but the technical details around financing and deposit requirements were all new to me.
Lenders Mortgage Insurance
Being a naturally inquisitive person who likes to learn, I found myself with financial institutions providing me with information that just posed more questions. I even managed to find a clause in the contract we eventually signed that they reworded due to one of my questions. In the end my questioning always ended with further understanding if not always agreement. But one thing stood out as very annoying – lenders mortgage insurance.
The marketing material would say things like “80% LVR with no LMI”. If you haven’t come across those acronyms before that is “a loan amount of 80% of the property value (Loan Value Ratio) with no Lenders Mortgage Insurance”. The idea of getting insurance for my ability to pay the loan seemed like a good idea. I almost didn’t question it. I already had contents insurance, car insurance, life insurance, and TPD (Total and Permanent Disablement) insurance. What could go wrong. The bank was letting me borrow up to 80% of the amount I need for the property, and because my deposit was large enough (20%+) they did not require me to have insurance (in case I couldn’t pay).
Oh how wrong I was! Lenders Mortgage Insurance IS insurance, but it is not to protect me, it is to protect the bank! If I couldn’t make my repayments and the bank had to sell the house, LMI would cover any losses incurred by the bank. They wanted to make me pay it. I suppose I should not be surprised, after all the Bank wants to protect itself. Even still, the idea that I would have to pay for the banks insurance just because I didn’t have a 20%+ deposit didn’t sit right with me.
This is where the magic 20% deposit that everyone talked about came from. If you have a 20%+ deposit then the bank believes you have enough of a down payment to cover any decrease in housing prices should you not make repayments. The bank thinks you are a safe bet. Well, safe enough not to need LMI and avoid paying to protect the bank.
What About Those Fees
Banks will (or used to) lend you somewhere up to 105% (possibly even higher in rare cases) of the purchase price for a property. The reason for loans greater than 100% is that there are fees you have to pay when you buy a house. A loan of 105% of the purchase price would not only cover the loan, but the fees as well. Since the GFC in 2008 this practice has all but disappeared, and you will find it hard to get a loan with an LVR over 100% today.
So what fees are we talking about? Well some of them that we came across are:
- stamp duty (first home buyers like us can get some nice discounts here)
- building inspection
- pest inspection
- legal fees
- conveyancing (ownership transfer documents)
- searches (checking for ownership, easements etc)
- home & contents (you needs one or both)
- income protection (if your situation needs it)
- bank fees
- loan application/establishment fee
- valuation fee
- other fees
- body corporate fees
- council rates
- moving costs
For a $500k+ home like ours this can easily start to add up. We ended up paying around $15k all up. This is the reason why you will see me saying 20%+ everywhere. In reality you want to have a 20% deposit AND the ability to pay all the fees involved in the purchase. The stamp duty is the main cause of that large number, and can also vary wildly from state to state and depending on whether you are a first home buyer or not. Currently the following are the costs for a non-first home buyer non-investment property that costs $500k:
- QLD: $10,112
- ACT: $14,928
- WA: $18,183
- NSW: $18,319
- TAS: $18,575
- VIC: $23,453
- NT: $24,213
- SA: $25,237
After buying your first home it is defiantly tempting to pickup stumps and move to Queensland!
So 20% Plus Fees?
This is where I am sure I will rub some people the wrong way. Many people seem to agree that 20% is good, and 20% plus fees is ideal. I am not going to challenge that too much, but instead tell you what we ended up doing.
After doing our sums and knowing what we could afford, what banks would lend us, and the sort of house we were after, we had a rough idea of what our 20%+ deposit would need to be. With a budget of around $500k and taking into account fees we needed approximately $120k worth of savings. So this was our strategy: save until we have our 20%+ deposit, and keep saving while looking.
You may end up lucky, and find the perfect house straight away. We didn’t. It took us a bit over a year to find the house we ended up buying. During that time however, we managed to save up an additional $50k. Suddenly that 20%+ deposit has turned into a 30%+ deposit. As you can imagine we were happy about this. It wasn’t just because we would be paying less interest, or that we would pay our house off sooner. It was because we instantly had just over $50k of redraw room in our home loan. This turned out to be the ultimate low rate credit card. We never had to worry about unexpected large bills, or cars breaking down. Just by waiting until we have our 20%+ deposit and continuing to save we managed to start off with an inbuilt safety buffer in our home loan.
A 30% House Deposit Sounds Impossible!
If you are trading up (or down) in the market, then you will probably already have your 20%+ deposit sorted. If not, go and work on your existing loan and get that 20%+ deposit.
If you are a first home buyer I have some sympathy for you. Not too much however. If you can’t get close to a 20%+ deposit then you are probably living too much above your means. As I said above the rental we lived in while saving for our deposit was about three times less than our minimum mortgage repayments for the house we ended up buying. That isn’t because we bought a fancy house, it is because we lived well within our means and wanted to get ahead.
What is your anticipated Remember To Water Repayment to Rent Ratio (RTW RRR) when you bought your first house? As I said our score was about 3. Our minimum repayment was three times higher than our rental payment. Anything under a 1 and you are living to well, find a cheeper place to rent and allow yourself to save the extra rent. The higher your RTW RRR score the better, assuming you are borrowing within your means. There is no point borrowing more than you can afford.
Thankfully the various governments have realised that it can be hard to buy your first home. This is why they introduced the first home owners grant and also provide reduced or removed stamp duty when buying or building your first home. The rules have changed many times since they were introduced, so be sure to check if you are eligible:
- Australian Capital Territory – ACT Revenue Office
- New South Wales – Office of State Revenue
- Northern Territory – Department of Treasury and Finance
- Queensland – Office of State Revenue
- South Australia – RevenueSA
- Victoria – State Revenue Office
- Western Australia – Department of Finance
So go on, get saving. Get rid of that LMI with a 20%+ deposit. Your future self will thank you.
Loving the blog and keen to keep following / connecting and would love to have you on my blog at some stage!
On the home loan deposit amount, I’ll say that I had <10% and barely 5% although didn't have to pay LMI.. you ask how?
I did it through a guarantor situation through my mum, which is certainly not for everyone however I would have still gone with the LMI even if I wasn't lucky enough to have a family member offer up some equity.. Attempting to save that extra 10% or so for me misses the point (if you're doing it for investment purposes).. By the time you save the 10% the prices may have then increased by 5%, which leaves you in a situation of chasing your tail.. Our most valuable resource is time, which helps with compound growth.. Then again it's gotta be about how comfortable the individual feels about debt, what they're looking to achieve etc
Looking forward to getting in touch! 🙂
I had not considered a guarantor situation, mostly because I do not believe our parents would do that. But if you can it definitely removes the need for LMI. I glad you managed to do that. By the time you have saved an extra 10% prices may also have fallen by 5%, so you could be getting a double bonus. If it is an investment then I can easily understand different points of view (as it is an income producing asset). But for a home, the larger the deposit the faster you can pay it off and the smaller the amount of interest you pay. In my specific case having a 20%+ deposit rather than a 10% (keeping our repayments fixed) saved us $223k of interest and 9 years, but only took 2 extra years of saving to get up to that 20%+ deposit. Even with the house price rises that happened over that time and the extra rent we had to pay it is well under $223k. It was closer to $80k to $90k, of which about $60k was the house price increase of about 6% for each of the 2 years. I count that as a big win, although like you said I don’t like “unproductive” (non income producing) debt.
Thanks for the response Tom! Will keep an eye out and liking the idea of your blog
Agree it really depends on what the situation is & I’m very grateful to have the opportunity to have the guarantor option available.
Not sure in Australia that I can see at drop in house prices, more likely they’ll stagnant or grow at 1% or so for a few years. Having said this I don’t pretend to be able to predict what any investment will do & in some areas i.e. Northern Beaches of Sydney or Sutherland where people may have paid too much for property could see a drop
Glad you are thinking the same as me for house prices. I wish I had data to back it up (I am an analytical person), but it just feels like house prices cant go shooting up from here, but also cannot fall by too much (or I think they may have done so more some time after GFC). Only time will tell. That is one of the reasons I started this blog, so I could put my predictions down and be able to look back years later and laugh (or cry).
Haha hopefully not too much or any crying :)..
It’d be great to have you check out my blog & get some perspective off you on your thoughts on it too.. I’ll shoot you a side note!
Is your blog at mycareercrusader? It currently seems to be a for sale page, so you may want to check the domain registration or something like that.
It’s actually moneyglee.com, mycareercrusader was an old one that is probably still associated with my WordPress sign-in here.. Not sure how to resolve that :O..
I got your note to my gmail account and was going to reply but looks like you beat me to it!
Wow congrats on buying your first home Tom!
I loved reading this article because despite the fact I don’t live where you are, I understood what you’re talking about (just translated it into Canadian terms :P).
I’ve been looking for our first house as well. Right now we’re almost at the 10% mark plus fees (thankfully, our fees aren’t that great here, I was quoted about $2-5000 in closing fees). I’m comfortable going in at 10% down payment (or deposit as you call it) but would feel even better if we got closer to the 20% so we don’t have to pay insurance. We’ll see how it goes though and if we find the right house. 🙂 congrats again!
Thanks Jaymee! There is a lot of differing opinions around down payments. As Jef pointed out one way to avoid LMI is to get a guarantor (or at least in Australia). Im a big fan of large deposits (you may have guessed), but as lots of people point out you can’t live life only in Excel (something I have to remind myself almost every day). Good luck finding a place you like – I am sure you will tell us when you do. I have a memory of a blog post you did about almost getting one previously.
Oooh I love that.. that comment about not living your life only in Excel (I’m so guilty of that so many times!)
And I feel flattered you remember that old blog post of mine 🙂 Yes still searching but I’m sure the wait will be worth it. Thanks so much Tom!