How much should I save for a house deposit?
If you’re saving for a house, it can sometimes be confusing to know when you actually have enough. A general rule for a deposit is to save as much as you can towards the purchase price to reduce the amount you need to borrow, the overall interest paid and to avoid the additional cost of mortgage insurance however as saving a huge amount of money takes time, we are limited by our income and also have general living costs to take into account, sometimes we need to adjust our expectations and move forward with our best case scenario.
It’s ultimately up to the individual on what will work best for your situation, but here are a couple of things to consider when deciding your overall spend which ultimately affects the amount you need to save:
- Will you be able to maintain your lifestyle?
- Can you maintain repayments if the interest rate changes?
- Do you have enough savings if your income levels are reduced to cover at least 6 months of the mortgage?
If you’re comfortable moving forward based on your answers to the above, then we would recommend proceeding with financial advice independent of the bank you are lending from.
Some banks are willing to accept a minimum of 5% of the home’s overall cost, depending on the type of loan you apply for however other factors will come into play at that point including your employment history, credit rating and can demonstrate a solid savings plan.
The ideal amount is 20% of the purchase price so for a $400,000 home you would be encouraged to save a deposit of $80,000. While this will take longer to save you will reduce the amount of interest you pay, you can avoid the mortgage insurance and you won’t need a guarantor. If you are a current homeowner, you may be able to access the equity in your existing home loan to cover the deposit although for first home buyers this is not an option.
Consider also the average home price of the area in which you wish to buy. If you have your heart set on a particular suburb but it’s outside your budget, look for an adjoining suburb which is within your price point. Getting in over your head on your first purchase is never a smart idea.
For solid independent financial advice, speak to S&L Financial Logic consultant Stephen Catterall and his team to understand if you’re fully ready to take the plunge.