How to save up for a home loan deposit

Home ownership is still a goal for many Australians, so it's important to understand how to begin saving for it. There are a number of things to consider when it comes to seeking out a mortgage for your first home. 

Here are some of the more common things to give consideration to when looking into purchasing your first property.

Take care of your credit first

Before you approach a lender, it's always a good idea to know what your credit rating is. Having a good credit rating can help you to potentially borrow more money from a lender. 

Paying back any outstanding consumer debts, closing down unused bank and credit accounts, and ensuring everything is in order before approaching a lender can do wonders for your chances of securing a mortgage. Adopting healthy credit behaviour early on is a great way to get into the habit of making repayments, and is essential for when you do secure a mortgage and are expected to make regular repayments.

How much should you have saved up before buying a house?

There are three main costs when getting a home loan: 

  1. The deposit
  2. Lenders Mortgage Insurance (not every borrower has to pay this)
  3. Stamp duty

The deposit and LMI

It's recommended that you save a 20% deposit and the bank will lend you the remaining 80% of the value of the property. In home loan language, this is called a loan-to-value ratio (LVR) of 80%. Many lenders will lend you up to 95% LVR - meaning you can get a home loan with a deposit of as little as 5%. 

But the catch is that if you borrow more than 80% of the property's value (meaning your deposit is less than 20%) you will need to pay Lenders Mortgage Insurance (LMI). Depending on the size of your deposit and how much you're borrowing, LMI can run into the tens of thousands of dollars. This is why a 20% deposit is generally recommended, as you can avoid being slugged for LMI. Some lenders might require a higher deposit for inner-city or high-density locations.

Work out what your monthly repayments could be using our home loan repayment calculator.

Stamp duty

Stamp duty is another major cost to factor in when saving for a house deposit. Stamp duty is the tax on the sale of the property and shares.

Luckily, if you're a first home buyer there are stamp duty discounts available in most states and territories. Depending on the purchase price of your property and where you're buying, you may even be exempt from stamp duty. 

Enter your details into our stamp duty calculator to work out how much stamp duty you may have to pay.

What can I use as a deposit?

Now that you've figured out how much deposit you need for a home loan, how much do you actually have to save? Can you get away with a 5% deposit home loan or a 10% deposit? Can you access funds from other sources?

Can I use my super as a deposit?

The short answer to this one is: not exactly.

While you can't really raid your superannuation fund for a house deposit, you can leverage your super through the First Home Super Saver Scheme (FHSSS).

Under the scheme, first home savers can make voluntary concessional (taxed at a discounted rate of 15%) and non-concessional (already taxed at your marginal rate) contributions into their super fund which can be withdrawn later for a house deposit. 

Can I use my inheritance or a gift as a deposit?

You can have gifts or inheritances approved as genuine savings (a phrase used by lenders to describe savings that you yourself have saved over a period of time - usually between three to six months) if you have a letter from the gift giver/executor in some situations. 

The amount of money will also need to meet certain requirements if you want to avoid the genuine savings rule. Most lenders will require a 20% deposit to avoid the genuine savings rule. Very few lenders will accept a 10% deposit without the need to confirm genuine savings.

The same rule applies to inheritance money. An inheritance can be used as a house deposit, but you'll need a 10%-20% deposit to get past the genuine savings rule.

Can I use the First Home Owners Grant as a deposit?

If you're a first home buyer and you're using the First Home Owners Grant (FHOG) you can technically use this to form part of your deposit if you're buying or building a new home. 

As the name suggests, these grants act as an incentive for first home buyers to buy real estate by offering funds towards the purchase.

However, the amount of financial assistance varies from state to state, which means you'll have to get in contact with a local real estate agent to discuss the potential of securing this for your own property goals. One thing that many of the states have in common is that the fund now only applies to the purchase of new homes - or properties that have never been occupied before -  and the construction of a new property by the first time buyer. 

The FHOG alone often isn't enough to make up a full house deposit. At the time of writing, the maximum grant available is $26,000 in the Northern Territory. In other states, it's closer to $10,000 to $15,000. 

Can I get a 100% mortgage?

Since the Global Financial Crisis, true 100% home loans are a thing of the past. The only real way to borrow 100% of the property's value these days is with the help of a guarantor which some lenders (not us) offer. 

How can I save up the money?

This is where the hard work begins. To save up for a house deposit, there are three main steps to take:

  1. Look at what you're spending
  2. Think about what kind of lifestyle you're comfortable with while you save
  3. Make a budget and maximise your savings

1. Review your finances and spending

Before you can begin to save for a house deposit, you must take a good look at your own spending. To build a budget and save for a house deposit, you need to be able to account for every dollar.

This means taking a step back and objectively reviewing your spending habits in order to figure out just how viable saving up for a home loan deposit is. Tallying your income against your expenses, credit repayments and savings can help you understand areas where you can cut back in order to save more money.

Saving up to 20% of a property's value while still making regular rental and bill payments can be a challenge - but knowing where your money is going and figuring out where you can cut corners is a great place to start. 

2. Assess your lifestyle

Once you've got a better idea of your spending, it's time to take a look at your lifestyle and ask yourself how much you're willing to sacrifice to reach your house deposit goals.

Take a look at the discretionary items you currently spend money on and ask yourself how much you actually need or want them. Are you willing to sacrifice a great deal of your current lifestyle (social events, new clothes, eating out) while you save for a house deposit? Are you willing to save on rent by moving back home or getting somewhere cheaper/getting a flatmate to maximise your savings?

If you are willing to sacrifice your current lifestyle temporarily while you save up, put your plan into action by trimming out any non-essential spending and building a budget.

3. Budget and save

Budgets should ideally be flexible and realistic, but because a home loan is a substantial savings goal, your budget needs to be aggressive. This means cutting out a lot of non-essential expenses and living frugally. 

Most people use the 50/30/20 rule for budgeting (50% for necessities, 30% for 'wants', 20% for savings). Normally, this is an ideal budget, but because you're saving for a deposit, you may want to allocate more money to savings. 

To do this, you may want to find areas in the 30% 'wants' section where you can tighten your belt. It may even mean trimming out areas in the 50% 'needs' section, by moving back home to save money on rent, using public transport instead of your car, finding ways to save money on utilities, etc.

You may want to consider storing your savings in a high-interest savings account or even consider utilising an asset class such as shares, to get the most out of your savings.

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