Far too often do we see First Home Buyers with only a 5% house deposit in savings thinking they’re now ready to enter the property market. This, at no fault of their own, is a problem as the term "5% Deposit" sets the wrong expectation.
Buying a house, especially our first, is one of the most exciting yet nerve-racking experiences we can go through in our lifetime. As someone that meets with first home buyers, usually before they hit up open homes and start actively searching for a home, there is nothing worse than telling someone who has spent months or years saving their deposit that they still don’t have enough. It’s gut-wrenching seeing the disappointment on their faces, having worked so hard and being so proud to find out their 5% deposit is not even close. “5% deposit”, a common term when buying a home and although correct, what this term fails to address is the additional costs associated with buying a home.
Example, a first home buyer saves $25,000 which is a huge effort. They find a house for $400,000 and are ecstatic as they have more than the 5% deposit required. They then meet with me to tell me the good news and so we can start their finance application. I then provide the following breakdown of what money they need to contribute:
$20,000 5% Deposit
$ 7,000 Stamp Duty (With 50% Concession Applied for First Home Buyers)
$11,650 Lenders Mortgage Insurance (based on $380k loan insured by Genworth)
$ 1,800 Allowance for Conveyacing/Legal Costs
$ 1,000 Allowance for Lender Costs
$ 3,000 Allowance for Sundry Expenses
$44,450 TOTAL REQUIRED
Based on the numbers above in this example, our client would be $19,450 short. Imagine being told you need to save almost double what you currently have to buy a house?!
As a very general guide, I like to use the 13% rule. If you have a 13% deposit instead of 5% (these are percentages of the property price) you will have sufficient funds, example; $400,000 purchase multiplied by 13% = $52,000.
If you’re a first home buyer and are eligible for the stamp duty discount, I would then work on 11%. Example; $400,000 purchase multiplied by 11% = $44,000 (similar result to the example breakdown given above).
So, what are these other costs and what do they cover? Starting with the cost most commonly confused, Lenders Mortgage Insurance. As per the example used above, this can be one of the highest costs of the loan but can also be quite cheap, it all comes down to how much deposit you have. At a 5% deposit, you’re paying the highest insurance premium but with a 15% deposit, you would pay significantly less. So what is it?! Lenders Mortgage Insurance, known as LMI, covers the Lender not the borrower. It is designed to mitigate a Lenders risk for loans that are in excess of 80% of a property’s value meaning, if you have 20% plus costs, you will not pay LMI. Example; I buy a house for $400,000 and to avoid Lenders Mortgage Insurance, I would need $80,000 plus costs. The costs become less however as I would not have the LMI to pay for. In some cases, there are Lenders that offer loans up to 85% of the property’s value without LMI.
Stamp Duty is payable to the relevant State Government for any property transfer of ownership. It is calculated on the value of the property at the time – for purchases, they use the purchase price. In very rare and uncommon circumstances they may use a different value for purchases. You can use the free stamp duty calculator by visiting the following link:
The allowances we make for other costs are each slightly overestimated to what is common however we work the numbers on the highest costs to ensure our customers don’t experience shortfalls the day of settlement - this can be a nasty experience for all. Conveyancing/Legal covers the professional fees of your Conveyancer or Solicitor and also search fees and other necessary costs as part of the buying process. Lender costs vary depending on which Lender we go with but in most cases will be under $1000 (usually around $300 to $600). Sundry expenses aren’t required to be included however we ALWAYS include them. This allowance covers things such as Council Rates and Water Rates, Rates are paid on a pro rata basis so it depends on the time of year you purchase as to how expensive these are.
In conclusion, for First Home Buyers, the Government Grants, Incentives & Schemes can be absolute key when purchasing a home. Failing that, there are options such as Parental Guarantee where parents can use their equity to help – more on this in posts to come. We encourage ALL prospective home buyers to make an appointment with your Broker first and discuss with them your borrowing power and also what savings you really do require.