Saving for your first home? The sooner you start the better.

We’ve seen a lot of news in the media recently: house prices are through the roof and we’re not sure when they might ease. 2020 left some of us with a bit more cash in the bank, even allowing us to scrimp together a good chunk for a first home deposit.

Research by Finder has revealed that the average house deposit is now over six-figures (a whopping $106,743, up 16% from January 2019). 

In theory, record low interest rates made paying off a home loan within reach of more Australians, but unfortunately house prices have gone up as a result, and now we are seeing interest rates rising making many home loans more expensive. It’s safe to say though, that the larger deposit amount you have, the greater likelihood of being able to work your way into the market.

Finder’s research also suggested that the average first home buyer is putting down a 20% deposit. Around 38% of first home buyers saved for their deposit over a period of two to five years. A further 25% took between five to ten years. 

What is this 20% we keep hearing about?

Generally, the recommended deposit for a home is 20% of the purchase price. But with median house prices in Sydney and Melbourne currently at $1.2 million and $936,073 respectively, a 20% deposit doesn’t seem possible without a large inheritance, winning lotto or having substantial access to the bank of mum and dad (and we do not recommend including any of these in your house plan budgeting). 

Where does this 20% come from? Well, it has to do with Lenders’ Mortgage Insurance (LMI). If your bank decides to approve you for a home loan with a deposit less than 20%, you will need to pay an additional cost that protects them from financial loss should you fail to meet their home loan repayments. This amount is usually a one-off payment and is often added to your home loan. The amount will vary depending on loan amount, location, and deposit. For example, purchasing a $600,000 home in Melbourne with a 10% deposit would mean an additional cost of nearly $15,000¹ in LMI (based on borrowing the remaining $540,000). 

It's not all doom and gloom for first home buyers

Government incentives and grants have helped eligible first home buyers fast-track their dreams of home ownership. First home buyers may be eligible for stamp duty exemptions, first home owner grants and other schemes (the programs on offer and the amounts available vary from state to state). 

To work out what schemes are right for you, it’s important to look at the schemes that are available in your state, while also considering the cost of your home loan over its lifetime, including interest, fees and how eventual rate rises may affect your ability to make repayments.