So you’ve decided that you’re ready to start the path towards owning your own home. You’ll first need to save for a deposit. But how much do you actually need to save in order to buy a property?
Generally speaking, in Australia 20% deposit is usually required by your bank. In some cases, you can buy a property with 5% however you will need to get lenders’ mortgage insurance (LMI). Another option is to purchase with a partner to cover the deposit portion of the loan.
For details on each scenario and other options, read on below.
Scenario #1: Saving a 20% deposit
This is the scenario that most buyers should strive for when saving to purchase a property. It’s not an easy goal to reach, however. If you’re looking to purchase a $500,000 property, you would need to save $100,000 to reach a 20% deposit.
If you’re able to save at least 20%, though, the benefits are worth it. You’ll avoid paying for lenders’ mortgage insurance (LMI), which covers the lender in the event that you are unable to make the payments on your mortgage. This insurance is usually added to the amount of your mortgage, which means you’ll pay interest on it. Over the length of your mortgage, this can really increase the cost of the insurance beyond its initial price tag. By saving a 20% deposit, you can avoid not only the base insurance charge but all of the interest you'd pay on it as well.
It's worth mentioning at this point that, recently, many lenders have begun asking for more than the 20% deposit when purchasing properties as they reassess the risk profile for those types of properties. A 30% required deposit is becoming more common.
Scenario #2: Saving a 5% deposit
In an environment where home prices are rising rapidly, it may not always be possible to save the 20% required in order to avoid LMI. Fortunately, you can purchase a property with as little as a 5% deposit upfront.
While you will pay for LMI on top of your mortgage, 5% is often a much more manageable amount to save for a property, especially for younger or first-time buyers. In the long run, the appreciation and equity you’ll build will usually more than offset the cost of the insurance.
Of course, 5% is the minimum amount you’ll need to save for a deposit; you can also save 10%, 15%, or anything in between. The more you save upfront, the less interest you’ll pay down the road!
Don’t forget about other fees
A deposit isn’t the only thing you’ll need to save for when looking to purchase a property. You’ll also want to be prepared to cover some or all of the following expenses:
- Stamp duty. This is a tax levied by all Australian territories and states on property purchases. It is charged as a percentage of the purchase price of your home, which varies depending on the home price. For example, on a $500,000 property, the stamp duty would amount to $11,400. But this may change some time in the future.
- Valuation fee. This is a fee that you’ll pay to have the value of your property appraised before purchasing. This costs roughly $600, depending on where you’re buying.
- Building inspection fee. This is a fee you’ll pay to have the property inspected for structural integrity and safety, as well as for pests. It can add another $600 to $700 to your final bill.
- Loan fees. Depending on where you’re financing your mortgage, a loan fee may or may not apply. Some lenders charge as much as $900 to settle your loan.
- Legal and conveyancing fees. These are costs payable when you purchase a property. The price tag can run anywhere between $500 and $2,200, although $1,000 to $1,500 is most common.
- Transfer fee. This is a fee you’ll pay to have your name registered on the property title. This signifies your official ownership of the property in the government’s eyes, and it often costs around $300.
These additional fees can easily add 3% of the purchase price or more to the costs of buying your property, so it’s important to plan for them in advance.
The most important thing when purchasing your first property is to have a savings goal in mind to make sure you can cover the amount of your deposit and other closing costs. If you go in prepared, you’ll set yourself up for a successful long-term investment.
If you are looking for a way to purchase a property in Australia without over-leveraging or a deposit, check out our offering at Invex. We’ll cover the deposit for you and spread the risk. Read more here.