One of the most difficult thing to do is to save up enough money for a deposit for your first home or on an investment property. The experts recommend that you have at least 20 per cent, plus an additional 5 per cent to cover purchase related expenses. But how realistic is it to save up a deposit, given Sydney's recent property boom and souring property prices?
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How Much Should You Save?
In today's real estate market, it's often very difficult to save up enough money for a deposit to buy a home. Most experts recommend that you try to save a "substantial deposit" - meaning at least 20 per cent. That's just the deposit alone, the experts also recommend that you also save an extra 5 per cent towards the cost of stamp duty, solicitors fees, conveyancing cost, building and pest and other bank fees and charges. The reasoning for trying to save a 20 per cent deposit is so that you avoid paying Lenders Mortgage Insurance or LMI.
Assuming that the average Australian puts aside 15-20 per cent of his/her salary towards the said deposit, it can take on average about 15-16 years to save enough money for a deposit for a home in Sydney.
The Reality
While saving a 20 per cent deposit may be easy for some who were lucky enough to be left left behind with a large inheritance, or who have the discipline and the income to match, the fact is that it's near impossible to save up this amount of money - particularly if you're trying to enter Sydney's property market while earning an average salary. By the time most people finish paying their rent, grocery expenses and other daily living expenses, we end up with very little to show for.
It's not just a problem for singles alone, even married couples find it hard to save enough for a deposit. According to the RBA, home ownership had dropped for those between the ages of 35 to 44 year old, from 75 per cent in 1980, to 60 per cent in 2010.
One of the biggest problem with saving up a 20 per cent deposit is that the property market often grows faster than our ability to save. If the average wage earner wanted to save up to buy a property in Sydney, they would have to wait 15 years to to come up with $155,000 in deposit money for a median priced property in Sydney in late 2015. While we're busy getting this deposit together, QBE predicts that property prices will rise by a further 7 per cent by the end of June 2016 - that's over $46,000 in as little as 6 months, and that figure is expected to continue to grow.
Paying Lenders Mortgage Insurance
Fortunately there is a solution to this conundrum. Instead of saving up the recommended 20 per cent deposit, if you have 5-20 per cent saved up, you may already have enough to put down as a deposit. The only draw-back is that you will have to pay Lenders Insurance Mortgage or LMI as it is often called. Generally, the less deposit you have, the higher the premium.
Instead of saving up for a 20% deposit, most investors and first home buyers bite the bullet and pay the required LMI. This solution, although imperfect as it is, will at least give you a good foot in the door to owning your own home.
For example a property that is worth $500,000 will require you to save $100,000 on a 20 per cent deposit, plus an additional $22,500 or 5 per cent to cover additional purchase costs. However you can lower the cost of your insurance by putting down a deposit of say, 12 per cent, which means that you only require $60,000, you could use the remaining money to cover the purchase costs for the property.
The cost of LMI may vary depending on the lender you go with, it's best to work closely with a mortgage broker to ensure you know what costs to you can expect to pay.
As with everything in life, whether you save up a 20 per cent deposit or bit the bullet and pay LMI will depend on your goals. It's a personal decision. The best decision is based on what you want to achieve, but it's sometimes good to talk through your decisions with a mortgage broker who can help you to work through your finances. If you would like to discuss your finance options with our mortgage broker, feel free to book an appointment or call us on 1300 266 266 and we'll see what we can do to help you.