As a first home buyer in 2022, on of the biggest barriers to buying is saving up the deposit. In Melbourne, the average time it takes to save a deposit based on the median house price is 5 and a half years.
Do I need a 5%, 10% or 20% first home deposit?
Where possible, we recommend our first home buyers have a 20% deposit plus costs (costs includes things like conveyancing, stamp duty, building and pest inspections, mortgage registration, rates and loan application fee). This can be through a combination of savings, a parental guarantee and gifted funds – certainly we are seeing more and more of our first home buyers relying on assistance throughout the savings process.
Depending on the purchase price the costs could equate to anything from $2,500 to $60,000 so it’s important to know what these expenses are going to look like before you make an offer. For a detailed look at what these costs are, check out our blog here.
If you have a 20% deposit then you have a wide variety of lenders to choose from, may have access to lower interest rates and won’t need to pay Lenders Mortgage Insurance (more about this below).
A 5% or 10% deposit will mean you will be required to pay Lenders Mortgage Insurance (LMI). LMI can be very expensive, however the bank will capitalise this into your home loan so it’s not something you would have to pay upfront, rather you pay off a few dollars with each repayment. Many first home buyers opt for this, as it allows them to save less and get into the market sooner.
My family are gifting me money
For those lucky ones whose family are gifting funds to go towards the property purchase, we would recommend they deposit this into your bank account at least three months in advance. This allows the funds to be classified as genuine savings and reduce the paperwork you’d need to provide, such as a statutory declaration.
Alternatively, if you family choose to gift the funds at the time of purchase, likely a statutory declaration will be required that the funds are a gift and aren’t expected to be repaid.
When would I have to pay Lenders Mortgage Insurance?
If you have less than 20% to contribute to your property purchase, then you will be required to pay Lenders Mortgage Insurance (LMI). You don’t generally pay this upfront as it can be capitalised onto your home loan, but it will accordingly increase the amount you need to borrow and your repayments.
The beauty of stamp duty exemptions
In 2022 the Victorian state government are giving substantial concessions to first home buyers. If you are buying for $600,000 or less then you receive the first home buyer exemption, meaning you don’t pay any stamp duty (subject to eligibility criteria). For purchases $600,001 to $750,000 you pay a discounted stamp duty (again subject to eligibility).
This can save you a lot of money (think $21.9K on a $500,000 purchase!) that you would otherwise need to have saved up to pay for. Just remember, for any future purchase you will likely have to pay stamp duty and you’ll need to have this amount to contribute independent of your deposit.
Need some help working out what deposit to save? Get in touch, our expert brokers are here to guide you through.