It's no secret that residential property has performed incredibly well in recent history, to the point where a lot of first-time buyers tell us it's becoming ‘impossible to get into the market. With even ‘smashed avo’ becoming a major barrier to entry, is all hope lost or is there more to it?
I am happy to share my views and experience as my wife and I are currently on the journey of building a house deposit so that we can eventually own our own home. You might be in the same position, or maybe you have a friend or relative that is looking to buy their first home.
The first thing that we need to remember is it takes time to save up for a large deposit. We are living in a world where instant gratification is becoming more and more prominent. So, take a step back and remember that it takes years to save up unless you have a huge savings capacity. My wife and I started saving a year ago and based on our current strategy it will likely take us another three years to save up enough.
We need to give a few things up if our main priority is to get into our own home sooner rather than later. I have committed to only buying coffee from the barista down the road on weekends (full disclosure, I fail about once a week). While it seems like a small purchase, it can literally lead to thousands over the journey of saving for your first home.
Figure out what is most important to you and that way you can determine what areas of your life you can ‘trim back a bit’ to put more towards your deposit.
If you are wanting to buy your first home, it is likely that you have also determined your ideal suburb to live in and what houses are selling for within these areas. This allows you to set a goal of how much you need to save towards a deposit. You can then start determining how much you would need to put away each week/fortnight to achieve this deposit over say three, four, or five years. Once you know that you can review your cashflow and determine if it is viable for you.
In a perfect world, you would save up a 20% deposit, as this would mean you do not need to pay LMI, which is a cost associated with borrowing more than 80% of the property value as a mortgage. It is widely viewed as an unnecessary cost, however, that doesn’t mean you are bound by the 20% deposit. You might decide that it is worth paying LMI fees if it means you can start paying off your own home loan instead of paying rent. Depending on your ideal purchase price, 20% can be a considerable sum.
Alternatively, you could investigate your eligibility for the FHLDS. Each financial year 10,000 eligible first home buyers can enter the market with only a 5% deposit.
The government then provides the guarantee for the participating banks that traditional LMI would usually cover. There are a number of requirements, so you can check your eligibility HERE
Don’t forget to review your own situation and make sure that borrowing a higher amount is appropriate for your circumstances.
I am also making use of the FHSSS. Given its relative complexity, it has not been a broadly used scheme so far, but I believe there is a benefit for my situation. This scheme allows individuals to make up to $15,000 of additional contributions to super (beyond your employer contributions) each year, up to a maximum of $30,000 over your lifetime (this could change to $50,000 as part of the Budget). These contributions then earn notional earnings (currently around 3%) and can be withdrawn in the future to help fund your house deposit.
I have been contributing an additional $10,000 per year to my super as part of this scheme and is deducted weekly from my pay as a salary sacrifice arrangement. This makes it easy for me to manage and I am now used to not having the additional funds in my bank account.
It is important to make sure you know how the scheme works, as once the money goes into super you cannot choose to withdraw it if you no longer wish to buy a house. Again, there are a number of requirements for the scheme that can be found HERE.
As you can see, the dream of homeownership doesn’t have to be a pipe dream. If you are willing to discover the tools and resources out there to help you, as well as set a goal, build a strategy and make some small sacrifices then it is entirely possible to buy your first home.
It is important to understand that this is general in nature, and everybody’s situation is different. Make sure you seek personal advice when determining what resources are appropriate for you.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email firstname.lastname@example.org or visit www.hewison.com.au
Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.