The national averages# for the time it takes an average-income couple* to save a 20% home deposit ($111,080) on a median priced house ($555,402) is 4.6 years. In contrast, it takes 4.2 years to save a 20% home deposit for a median priced apartment.
*An average combined salary of $116,789, and setting aside 20% of their combined pre-tax income annually into a high-interest savings account.
Importantly, whilst the national averages are in some respects a helpful gauge of the housing market, they don’t highlight several things. For example:
Not to mention, the implications of an average-income single saving a 20% home deposit.
All that being said, broadly speaking, given the current climate (e.g. housing prices, wage growth and living costs), one of the biggest hurdles that remains, for first homebuyers especially, is saving an adequate home deposit (e.g. avoiding Lenders Mortgage Insurance or a loan guarantor arrangement).
With this in mind, we offer some helpful tips. Admittedly, they are predominantly directed at first homebuyers; however, those looking to purchase an investment property or their next home may find some of them useful as well.
Understanding your borrowing power
If you are starting your home deposit saving journey from scratch, probably one of the first ports of call is to get a handle on your potential borrowing power, namely, how much you can afford to borrow from a financial institution (e.g. bank, credit union, or building society) when taking into account the following:
Importantly, if you receive a:
This brings us to our next point.
Doing your housing market research
Property is generally regarded as a long-term investment due to the purchasing and selling costs, relative illiquid nature, and potential price volatility in the short-term. Consequently, it’s important to be clear on what your needs may be not only for the short-term, but also for the medium to long-term (e.g. will it give you room to grow if there is a new addition to the household).
With this in mind, it’s time to do your housing market research – jumping online to view listings, visiting open houses and enlisting the help of a professional may prove beneficial in this regard. Importantly, in conjunction with the abovementioned considerations, keep in mind two questions, which depending on your personal circumstances may or may not be in harmony with another:
Once you have short-listed a few properties that tick all of your boxes, the next step is working out the adequate deposit that you need to save to purchase a home. Maybe consider taking an average of the asking prices for the properties that you have shortlisted.
Importantly, an adequate deposit can typically represent a Loan to Value Ratio (LVR) of ≤80%. The rationale behind the ≥20% deposit is that not only does it give you greater equity in your home and a reduction in your mortgage commitments, but it can also help you to avoid Lenders Mortgage Insurance or a loan guarantor arrangement.
At this point, it may also be worthwhile conducting an investigation into whether you qualify for any grants (e.g. the First Home Owner Grant scheme) and/or stamp duty exemptions and discounts.
Assessing your personal finances
Now that you have a handle on the current housing market and what an adequate deposit may look like, it’s time to take a look at your personal finances and how they interact with your ability to save. For example, consider the following:
Putting your savings to work
With the above in mind, what’s your surplus income at the end of each payment cycle, namely, how much can you afford to save? Once you have figured this out, it’s now time to consider your options in terms of where to put your surplus income? For example, depending on your personal circumstances (e.g. financial situation, goals and objectives), this may involve utilising one (or more) of the following:
Please note: The Federal Government abolished first home saver accounts effective 1 July 2015.
Importantly, when it comes to making a decision as to where to put your surplus income, several things need to be carefully considered. For example, fees, diversification, inflation, asset allocation, risk versus return, liquidity, compound interest, dollar cost averaging and taxation.
If you have any queries about this article, then please contact us.
#Bankwest. (2017). Bankwest First Time Buyer Report.