How to Make Sense of Your First Deposit

How to Make Sense of Your First Deposit

Published by DEICORP – 18 September 2018

Saving for a house deposit is something that many young people aspire to—but before you buckle down and start pinching your pennies, you’ll want a firm grasp of exactly where you stand.

How much do you really need to save? What’s the average house deposit? As well as your deposit, what other upfront costs do you need to account for? How can you get around the common hurdles facing first home buyers in a competitive real estate market?

Property developments offer an ideal entry point into real estate for young people. They’re affordable, they offer the conveniences of city living and low maintenance, and there are even financial incentives thanks to government offers and deals with property developers. Apartment developments can be a no brainer for your first home.

Here we’ll look at exactly what you need to know before you start saving—with a focus on property developments. Or if you’ve already got some savings stacking up in the bank, how to put yourself in the best possible financial position to pounce when your property developers announce their next big project.

Defining the Deposit Amount

Let’s start with the basics: the deposit amount. When you start talking to family members and even real estate professionals, you’ll often hear a 20% figure being thrown around.

It’s important to consider a few things at this point. Firstly, years ago (probably when your parents were buying), 20% (one-fifth) of the purchase price was considered a standard amount needed for your deposit.

These days, this figure rule doesn’t apply as often. More often than not, you can apply for a loan with only a 10% deposit, or in some cases—particularly when it comes to newer apartment developments—less than that.

For property developments that are pre-build or mid-build, many property developers can help you secure 5% house deposit offers.

But, there is still something special about the threshold of 20%, and that’s where lender’s mortgage insurance comes into play.

Less Than 20%? You’ll Pay Lender’s Mortgage Insurance

If you have a deposit amount of under 20%, then that’s okay. But, in most cases, you will need to pay an additional fee, called lender’s mortgage insurance. This is the lender’s way of covering themselves as you’re considered a slightly riskier loan.

Many people get caught up in the idea of having to scrape together 20% in order to avoid paying lender’s mortgage insurance. It’s a fair assumption—who wants to pay extra money when they don’t need to? It’s worth remembering this fee is a fairly small amount in the larger scheme of things.

If you’d prefer to pay less, remember the more you borrow, the more lender’s mortgage insurance you will have to pay.

Let’s say that you’re looking at apartment developments with prices at $500,000. Once you’ve taken out additional fees like stamp duty, transfer fees and government fees, you might be left with $50,000 for your deposit—a clean 10%.

As it’s lower than 20%, you will have to pay lender’s mortgage insurance. Depending on the rate of your loan and your loan terms it will vary, and could cost you around $8,000 in this example.

To understand what your personal mortgage insurance premium might be, start by using a calculator.

From here, you’ll need to do some number crunching and work out if you would be better off buying now and paying the fee, or waiting another year before you buy.

The latter will give you time to save a higher deposit, but you’ll also still be paying rent, and the value of the property might have increased significantly during this time.

Depending on the cost of the apartment you’re interested in, aspiring to a square 20% figure could take several years of hard work – and you may miss out on the apartment development you want to live in.

Shopping Around For Your Mortgage

Now that we’ve established your deposit amount can vary based on your situation and your willingness to make sacrifices, you’ll need to investigate the different types of mortgages available to you.

Shopping around is worthwhile—just half a percent difference can equate to thousands of dollars in savings over 30 years.

One of your parents may be able to act as a guarantor.

This involves them placing their own assets, such as their house, as security to guarantee that the repayments will be made if you cannot meet them. In the eyes of the lender, you’re now a much smaller risk, so you won’t have to pay lender’s mortgage insurance.

However, there are risks involved with this approach, so it’s important to have a conversation with your family—as well as their agreement—that this is a course of action they are happy with.

You’ll also need to consider your loan options for apartment developments.

This includes variable rates, when interest can fluctuate, or fixed rates, when interest is set for a period of time.

You can also choose from a principal and interest arrangement, or interest only for a fixed period. For interest-only loans, it is important to consider the rise in repayments after the interest-only period ends, and whether you will be able to comfortably make that repayment.

It’s also worth reiterating there are fees beyond just your deposit amount.

In certain states—like South Australia—your stamp duty can be surprisingly high if you’re unprepared. However, there are plenty of government incentives for purchasing property, particularly around new property developments and apartment developments.

Consider the options available to you so that you can take advantage of these offers from property developers when you have an appropriate budget saved.

For further information on your specific situation, speak to a broker or your bank about your options and your immediate steps to get you into your first home sooner.