You could own your first home in as soon as 12 to 18 months. We have helped several people do just that in the couple of years.
If you’ve imagined owning your own home, but think it will take too long to save up the deposit needed, you might be surprised at how quickly you can save for a deposit and how little money you need, with the right loan.
If your circumstances allow, we recommend the following steps:
Step 1:
Work out the household budget you will need to support a home loan and stick to that budget now. That budget, even if you are paying rent, should produce a surplus income that will accumulate in your bank account – and this will become your deposit.
Ultimately, if you can’t save while paying rent, you are unlikely to be able to afford a home loan.
We have added a detailed budget example below later in this article.
Step 2:
Save a 5% deposit (plus costs for Stamp Duty) and use the First Home Guarantee Scheme.
If you qualify to use the First Home Guarantee Scheme, the federal government will guarantee your loan with only a 5% deposit, allowing you to avoid expensive Lenders Mortgage Insurance.
Those lenders who have been given allocations under the First Home Guarantee Scheme are offering the same loan conditions as for borrowers who have a 20% deposit, meaning you not only avoid Lenders Mortgage Insurance, but you also get a better interest rate than you would if you were applying for a normal loan with a 5% deposit. In addition, the lending policies applied to loans of 80% are more flexible, increasing your chances of successfully qualifying for a loan under this Scheme.
Check to see if you qualify for the First Home Guarantee Scheme, but following are some basics. You must:
1. Not have owned a home in Australia in the last 10 years.
2. Earnt less than $200,000 p.a. (couple) or $125,000 (single) in the previous financial year.
3. Spend less on your home than the cap for each city, region and state (eg Brisbane has a maximum home price of $700,000).
4. Save a 5% deposit.
A “trap” to avoid
The First Home Guarantee Scheme works once, meaning it will help you avoid Lenders Mortgage Insurance for your initial purchase only.
If you refinance down the track, you will pay Lenders Mortgage Insurance if your loan is greater than 80% of the value of your home. As lenders tend to increase your interest rate over time, your loan interest rate can become uncompetitive and expensive when compared with loans offered to new customers. For this reason, you will ideally want to remain in a position where you can refinance with another lender at any time, if only to remain in a strong position to renegotiate with your current lender.
For this reason, once you have your loan, focus on paying it down to 80% of the value of your home as soon as you can (over a 2-3 year period if at all possible). If you are lucky, a rise in the value of your home will assist you with his goal.
Let’s look at an example budget and savings plan for a couple and a single person.
Couple
Let’s assume a couple wish to purchase a home for $700,000:
Deposit 5% $35,000
Stamp Duty and other transfer costs $20,000
Total required $55,000
In the example below, a couple earning a combined income of $170,000 can save $3,700 per month, meaning they are able to save the $55,000 needed to fund their purchase within 15 months.
Assumptions:
· Applicant 1 gross income = $90,000 (approx. $68,000 after tax)
· Applicant 2 gross income = $80,000 (approx. $62,000 after tax)
Total net income = $130,000 or approx. $10,800/mth
We have assumed living expenses of $7,100 per month and detailed a typical budget in the table below:
Category | Monthly Expense | Annual Expense |
Clothing & Personal Care | $300 | $3,600 |
General Insurance (car, private health) | $400 | $4,800 |
Groceries | $1,400 | $16,800 |
Medical & Health | $200 | $2,400 |
Personal Insurance | $250 | $3,000 |
Phone, Internet, Media | $250 | $3,000 |
Primary Residence (electricity, water) | $300 | $3,600 |
Recreation & Entertainment | $900 | $10,800 |
Rent | $2,200 | $26,400 |
Transport (fuel, rego, servicing) | $800 | $9,600 |
Total | $7,100 | $85,200 |
Your personal budget will vary depending on your circumstances and lifestyle. If this seems unreasonable to you, keep in mind, we see many examples of expenditure for young couples (we have assumed a couple early in their lives, before kids and major expenses begin) and the budget above allows for a comfortable lifestyle and is reasonable for most people.
The above budget would allow a couple to manage a home loan assuming an interest rate of 5.8% p.a. and a 30 year loan term. A lender will stress test your ability to make home loan repayments at 3% higher than current rates, but your rent can be used to meet this requirement.
Click here to check approximate home loan repayments for various loan sizes and interest rates.
Single
In this example, we have assumed a $400,000 home (unit) purchase:
Deposit 5% $20,000
Transfer duty and other costs $2,000
Total required $22,000
In the example below, a single person earning an income of $90,000 can save $1,600 per month, meaning you are able to save the $22,000 needed to fund your purchase within 14 months.
Assumptions:
· Gross income = $90,000 (approx. $68,000 after tax)
Total net income = $68,000 or approx. $5,600/mth
We have assumed living expenses of $4,000 per month and detailed a typical budget in the table below:
Category | Monthly Expense | Annual Expense |
Clothing & Personal Care | $150 | $1,800 |
General Insurance (car, private health) | $200 | $2,400 |
Groceries | $700 | $8,400 |
Medical & Health | $100 | $1,200 |
Personal Insurance | $125 | $1,500 |
Pet care | $100 | $1,200 |
Phone, Internet, Media | $125 | $1,500 |
Primary Residence (electricity, water) | $150 | $1,800 |
Recreation & Entertainment | $450 | $5,400 |
Rent | $1,500 | $18,000 |
Transport (fuel, rego, servicing) | $400 | $4,800 |
Total | $4,000 | $48,000 |
As stated above, your personal budget will vary depending on your circumstances and lifestyle. While it might take some sacrifices, in our experience, the budget above allows for a comfortable lifestyle and is reasonable for most people saving for a home.
The above budget would allow you to manage a home loan assuming an interest rate of 5.8% p.a. and a 30 year loan term. A lender will stress test your ability to make home loan repayments at 3% higher than current rates, but your rent can be used to meet this requirement, in addition with other surplus income.
Click here to check approximate home loan repayments for various loan sizes and interest rates.
Lenders use 3 months expenditure data (bank and credit card statements), so you need to ensure you are sticking to a budget that supports your ability to make loan repayments for the 3 months prior to a loan application.
Please note: these examples are based on assumptions, lending policy and rates that may change over time. The budget required to get your loan approved may be tighter than the ones shown above.
Here are some tips for maintaining a tight budget and preparing for a loan application:
· Avoid car loans, personal loans and credit card debt
· Avoid buy-now-pay-later (After Pay)
· If you do use a credit card, make repayments on time each month and do not go over the limit
· Let family and friends know you are saving for a home and will be sticking to a tight budget for a while
While home prices might be at record levels, they may not be any cheaper again. If you are sick of the rental market or tired of living at home, you could have the keys to your own home in as little as 1-2 years.
Step 3:
Talk to a mortage broker. Contact us to work out an exact savings timeline for your situation and a budget that will support a home loan. Or, if you already have a 5% deposit, contact us to apply for the First Home Guarantee Scheme and find out which loan suits you.
