You need a 20 per cent deposit to buy a house #lies
Here’s a thing that our ol’ boomer mates are relentlessly drilling into our heads: you need a 20 per cent deposit to buy a house.
Thanks, pals, good to know. Well it would be, IF IT WAS TRUE.
A whole generation thinks it needs $130,000 in the bank to buy a $650,000 home. It’s no wonder we’re all like ‘yeah, nah’. Thing is, that's not necessarily the case. What deep dark conspiracy is this?
We spoke to buyers' advocate Kate Vines to find out how much you actually need. You might have enough saved to do something. And she’s a millennial, so you know she’s got your back.
You can take advantage of lenders mortgage insurance (LMI) to get into the market faster
Kate says LMI can help people who’ve got less than 20 per cent get a property now. ‘It is a one-off amount that can be paid up front or it can often be worked into the loan so it's paid off over the life of the loan,’ she explains. What’s the catch? Well, she says it ultimately results in paying more money. BUT, if you buy wisely, six to 12 months before you’re ready, what you spend on LMI you more than make up for in property value over time.
Plus she says if you’re waiting to get to 20 per cent, ‘you might find the market has leapt ahead of your initial goal by the time you get there.’
This is Kate’s example: ‘Say the property you want is $500,000 and you only have a $70,000 deposit saved up (equivalent to a 14% deposit); suck up the LMI to buy that property now because by the time you have the $100,000 required, the property will probably be worth, say, $550,000 and your $100,000 will only be an 18% deposit.’
Kate points out that having the full deposit is always preferable, but it’s not if you can’t save as fast as prices are rising. If you’ve watched the market, ‘The LMI amount will be absorbed most likely in the first year as values increase,’ she says
Use a smaller deposit as a stepping stone on the way to your dream
Kate says that if you have a small deposit, but you haven’t found the 20 per cent to invest in your ideal location, look at what you do have and where you can use it now.
‘The investment property will be your stepping stone to bigger and better things. Purchasing the right property is so imperative to ensure you maximise your exposure to capital gains,’ she says. This is not to be confused with the capital gains tax, which you pay when you sell. The capital gains you make on the growth can be used to buy your second property, ‘This subsequent property might be the one you want to own AND live in,’ she says.