What Will I Need To Save As Deposit For My First Property? Exposing The 5% Myth
For those that are saving to purchase their first home, the question of what they will need in the bank before applying for the loan is a common one. A quick google search will often mislead that it is 5%. That depends on many factors which will be covered in this article.
The 5% answer (5% of your intended purchase price) is a part of the lender requirements for genuine savings (funds accumulated in an account over time). As there are associated costs and a maximum loan amount as part of the variables to be considered, you can count in many cases that you also have to save further to cover this gap. Australia’s banking regulator (APRA) has been working hard on the banks to bring down banking lending margins, such that the days of the 100% home loan are well and truly a thing of the past and savings requirements are growing. First home buyers are going to need to get used to knuckling down on their savings targets for some time to come if they are not lucky enough to get some parental assistance.
Recently, based on changes to lending margins, the market across the lenders is normalising to a common ground of a maximum lend of 95% of the purchase price including such fees as mortgage insurance, stamp duties and other associated costs. We ran some numbers to see how this affected savings targets/goals for our potential first home buyer clients. While there are options to some for parental guarantees or gifted funds to allow them into the market earlier, the following figures are based for clients that don’t have these options available, and all contributions to their purchase will come from their own pockets.
Purchasing Without First Home Owner Grant (FHOG)
The first table is based on a First Home Buyer purchase in Queensland (for an established property) and takes into consideration such things as Qld Stamp Duty, etc as applicable to the purchase for a first home buyer and owner occupied purpose. In Queensland there is no first home buyer grant for established (previously occupied) properties, although there can be concessions on stamp duties.
In these examples, the clients will have between 8.2% and 11.6% of their intended purchase price to contribute toward a purchase. Yes, they may tick the 5% genuine savings box at a lower deposit, but they’ll not have enough to complete the purchase (or gain their approval) without additional savings or funds from another source.
Next we look at how the First Home Owner’s Grant can contribute to the additional saving required.
Purchasing A New Property with Assistance From The First Home Owner Grant
In the following table, this is for clients purchasing a new property with the assistance/eligibility for the Qld First Home Owner’s Grant (FHOG) currently at $20,000 until June 30, 2017. The borrower still needs to show 5% genuine savings to the approval, however the FHOG can cover or at least reduce the additional savings target in the purchase ranges as follows (owner occupied purpose).
From this table, it can be shown that 5% deposit as genuine savings is sufficient to cover the purchase to around $500,000 for a new property and ranges between 5% and 8.8% of purchase price in contributions/savings. In these examples, $20,000 is covering or contributing to the additional funds above the 5% requirement.
Are You Seeing Advertising To Get Into Your Home Without A Deposit?
I see these ads all the time, and essentially they are to get you in the door. If you have a parent that can ‘guarantee’ equity in their property toward your purchase or gift funds in lieu or part of your deposit, it can be an option that is not available to all. This is however an entirely different process.
Should you have the option for a parent to gift or provide additional equity via a guarantee (or something else you may consider beneficial), discuss these with us as it may get you into your dream property sooner.
So purchasing new vs existing property is going to make a difference to the approval and savings requirement. There are however merits to each and a matter for individual preferences. There are many other factors in the approval such as valuations, etc however your broker can take you through these as they identify your specific requirements and position. While there may be some variance between lenders currently, this is a best ‘crystal ball’ moving forward allowing for those wanting to enter the market a reasonable target to get them into a position to purchase.
The answer to the deposit question (without parental assistance) has varied in these examples between 5% and 11.6% of the purchase price, so you do need to work with your broker to work on the numbers for your preferences. No deposit (0%) is still an option with strong applicants in combination with willing parents.
Should you have the option for a parent to gift or provide additional equity via a guarantee (or something else you may consider beneficial), discuss these with your broker as it may get you into your dream property sooner.
** Figures used in this article are for illustrative purposes only and may vary depending on your individual circumstances, lender policies and changes in the market. Contact us to discuss your own specific scenarios.
Michael Schipper from Talk Home Loans is a home loan specialist and mortgage broker based in Brisbane. Contact him about how to maximise your results from your home and investment lending.