Feb 5, 2022 4 min read Finance

How Much Money Do You Really Need To Purchase A House

With the property market booming over the past 2 years, people are concerned that they may not be able to afford a house in a few years time. One of the hardest obstacle in trying to afford a house is the deposit required for the loan. BUT, there is a misconception that you need a 20% deposit in order to buy a house or much rather not everyone is well informed of this. Some lenders are willing to go as low as only requiring a 5% deposit in order to get a loan. Although in order to pay a smaller deposit, you will need to pay an additional fee called a Lenders Mortgage Insurance (LMI).

What is LMI?

Lenders Mortgage Insurance (LMI) is a one-off premium that's added to your home loan. It's calculated based on the size of your deposit and how much you borrow. The more money you have for your deposit, the lower the cost will be.

This is a fee that banks and other lenders charge borrowers when they’re deemed high risk. Usually, this is when the deposit is less than 20% of their property’s purchase price or those who are applying have an inconsistent income. Technically, the borrower pays the LMI payment in a lump sum at settlement. However, many lenders will offer to finance LMI into the home loan, so it’s added to the monthly mortgage payments. This means borrowers don’t need to have the funds upfront, but it also means paying more interest on the overall loan, resulting in higher monthly repayments.

Pros and Cons of paying with a bigger deposit

Pros:

Pay less LMI
More negotiating power with the bank/lender
Less interest paid in total

Cons:

More time spent saving while market increases
Opportunity costs with using your money on other investments

Pros and Cons of paying with a smaller deposit

Pros:

Enter the property market sooner by taking out a home loan with a smaller deposit
Start growing equity in a home

Cons:

Pay more in LMI
Fewer loan options
More interest paid in total

Other incentives to help purchase a house

First Home Owner (New Homes) Grant

The First Home Owner Grant is only available to newly built or substantially renovated homes. The grant is not available for established homes.

This grant basically states that you are able to receive a $10,000 grant when you buy or build your first new home. Your first new home can be a house, townhouse, apartment, unit or similar that is newly built, purchased off the plan or substantially renovated.

General conditions for the grant:

The purchase price must not exceed $600,000
For a contract to build a home or if you're an owner builder then the property value (house and land) must not exceed $750,000

For more information on the grant, please check out: https://www.revenue.nsw.gov.au/grants-schemes/first-home-buyer/new-homes

First home buyer assistance scheme (FHBAS)

Under the FHBAS, if you’re a first home buyer, you may be entitled to a concessional rate (discount) for your transfer/stamp duty. It applies to:

Buying an existing home
Buying a new home and
Vacant land on which you intend to build a home.

If you are purchasing a new home valued less than $800,000 then you can apply for a full exemption and pay no transfer/stamp duty. But if your new home is valued between $800,000 and $1 million, then you can apply a concessional rate (discount) based on the value of your house.

If you are purchasing an existing home valued less than $650,000, then you can apply for a full exemption and pay no transfer/stamp duty. But if your new home is valued between $650,000 and $800,000, then you can apply a concessional rate (discount) based on the value of your house.

For more information about this scheme, please check out: https://www.revenue.nsw.gov.au/grants-schemes/first-home-buyer/assistance-scheme

First Home Super Saver (FHSS) Scheme

The First Home Super Saver (FHSS) scheme is another method to help you save for your first home through voluntarily depositing money into your super fund. The reason why this helps is because of the concessional tax rate that gets applied to your superannuation.

How it works is that the first $27,500 that goes into your super account each year is taxed at just 15% not the usual marginal rate. Note that any compulsory contributions your employer makes, as well as your own voluntary contributions, are counted towards this threshold. So if you're trying to save more money, then this would be a great way to pay less in tax in order to purchase your house.

However, it's super important to note that the scheme only allows buyers to access the additional super payments they’ve made for the purpose of buying a home. So make sure that it is money that you can afford to deposit. Think of it as the "Fun Money" bucket which I referred to in the 70/20/10 rule.

For more information about this scheme, please check out: https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/first-home-super-saver-scheme

Is it better off saving for a bigger deposit?

This all depends on how eager you are in purchasing the property and your individual circumstances. At the moment, it seems like there is no end to the increasing value of properties and waiting a few months to save additional money to avoid paying LMI might mean that properties could be soon out of your budget.

It is definitely important to consider and continuously reassess your options as the market is rapidly changing and you wouldn't want to miss out on an amazing opportunity. The more you can give the bank, the better, because the less interest you’ll pay. But it does just come down to financial situation and making sure that you are able to make the repayments.

Getting the deposit it just the first step, it is important to know about some of the hidden costs when it comes to purchasing a house. Make sure to subscribe so that you are one of the first to find out.