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Three ways to beat house deposit blues

deposit

 

Four years: that’s how long it takes on average for a first-home-buying couple in Australia to stump up the $100,000 needed for a 20% deposit on the median-priced home.

If you’re buying in Sydney, the most expensive market, couples need to save for eight years on average to put down 20%.

These sobering figures come from Bankwest’s latest First Time Buyer Deposit report. The trouble is that the report, issued in late 2015, based its results on a median home value of $498,500. But figures from CoreLogic show the median home value had risen to $575,000 by April 2016, pushing the goal posts even further out.

That’s not to say buying a first home is impossible. The solution is to get some smart tactics under your belt. Here are four  strategies to get you over the line sooner.

1. Sure but steady: Save a 20% deposit

Based on the current national median home value of $575,000, you could need $115,000 for a 20% deposit. It’s no small target but the upside of a decent down payment is that you’ll avoid lenders mortgage insurance (LMI), which can run into tens of thousands of dollars (more on this later).

ME Bank home loans head Patrick Nolan says there is no magic bullet for building a healthy deposit. Rather it’s about starting a savings habit early and sticking to it.

Set a target so you have something to work towards and, instead of waiting to save cash left over after each pay day, Nolan suggests setting up an automatic transfer that regularly sweeps cash from your transaction account to a dedicated savings account.

The sure-but-steady route may call for lifestyle sacrifice.

“Most of the first-home buyers we see still live at home and they manage to save a decent deposit by concentrating on saving as much as they can. That typically means having a good budget and sticking to it,” says Darren Sambrooks, a Fremantle-based Mortgage Choice broker.

“We are even seeing some first-home buyers who ask their employer to take out additional PAYE tax on a regular basis so they get a lump-sum tax refund each year to put towards their deposit. It’s not something I’d necessarily recommend but it can be helpful if you’re concerned about your ability to save.”

Building a solid deposit can be harder if you’re renting, and it is worth comparing the rent you will pay in the time taken to save your deposit with the savings on LMI.

“Buyers could end up in front, getting into their own home sooner, even if it means wearing an LMI premium,” says Sambrooks.

2. The fast track: Go for the minimum deposit

Now let’s ramp things up. While a 20% deposit is good, it’s not essential. You can get into your first home sooner by making the absolute minimum downpayment – that’s 5%, says Sambrooks.

On that  $575,000 home, a 5% deposit is a more achievable $28,750 and there is no shortage of lenders that will provide 95% of a property’s value at wafer-thin rates – some below 4% (see table on page 48).

But there are downsides. Save anything less than 20% and you’ll be slugged with LMI. And because their premiums are stepped, the lower your deposit the bigger the premium. The website of mortgage insurer Genworth (genworth.com.au) has an LMI estimator that can give you an idea of the cost. The good news is that LMI may not have to be paid in upfront cash.

“Most lenders will let you add LMI to the loan,” says Sambrooks. However, that can take your borrowings beyond 95% of the property’s value. “Borrowing 98% of the property’s value, including LMI, is the maximum limit and it’s offered by only a few lenders,” he says.

If you’re buying with a minimum deposit, be sure to compare  lenders. The cost of LMI can vary tremendously. “On a home worth, say, $550,000, buying with a deposit of 5% can see the LMI premium range from $16,000 to $26,000, depending on the lender,” says Sambrooks.

Be aware you’ll need more than just the deposit. “Many first-home buyers don’t realise they need additional cash to meet the upfront costs of buying a home, including stamp duty and legal fees,” says Nolan. Realistically it pays to have a bit more cash up your sleeve to cover buying costs.

3. I can’t wait: Ask your family for help

If you can’t wait to save a 5% deposit, ask your parents or other family members for a helping hand.

“It is quite common for parents to provide a cash gift and the sums handed over can be significant,” says Sambrooks.

“We have seen instances where parents have gifted hundreds of thousands of dollars to their first-home-buyer child.”

ME research backs this up. “Over the last five years, one in four (26%) first-home buyers have received financial assistance from a family member,” says Nolan.

ME’s survey found families are lending or gifting an average of $42,000 to first-home-buying relatives. But there are strings attached to this approach.

“If the cash is a genuine gift with no expectation of repayment, lenders want to see a statutory declaration from parents, or whoever the giver is, to this effect,” says Sambrooks.

Nolan adds: “Even when a cash gift forms part of a deposit, lenders still like to see evidence of regular savings, typically for a minimum of three months.”

One way to meet this condition, says Sambrooks, is to ask parents to drip-feed a cash gift over several months rather than provide a single lump sum.

Receiving a loan from mum and dad can help but it’s not a fail-safe solution.

“Around one in four first-home buyers receiving support from relatives are being charged interest on the family loan – probably from parents aiming to provide a life lesson about the value of money,” says Nolan.

Importantly, he says, repayments to family members need to be included in your regular outgoings on your home loan application and, if lenders aren’t comfortable that you can handle the entire debt,  your application could get knocked back.

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