Saving up for a house deposit? Here’s what you need to know.

things to think about before buying first home

Remember when you could buy a three bedroom house with a rear garden within 20km of the CBD for less than $350,000? Yeah, neither do we.

According to CoreLogic’s latest property price data, the average Sydney house is now a whopping $1.08 million, with Melbourne not too far behind at $811,000, Canberra at $645,000 and Brisbane at $527,000.

Depending on the city in which you live, your income and saving capacity, it may take up to 10 years to save up for a deposit, especially if you want to avoid Lenders Mortgage Insurance by saving at least 20% of the total purchase price.

They say a journey of a thousand miles starts with a single step, so if your destination is property ownership, and ideally before your forties, read on.

Work out what you want

The first thing you should do is figure out what kind of property you’re looking to buy. Is it a three bedroom townhouse? A one bedroom studio apartment? A two storey McMansion? Or a few acres of land out bush to drop a shipping container on?

Once you’ve decided on the non-negotiable criteria for your property, you need to map out what area you can afford to buy into. Remember to take in factors like school catchments, access to public transport, proximity to amenities like shops, libraries, sporting facilities, public spaces and any future planned developments that could impact on the value of property in the area.

See: The risks of investing in property

Work out how big a deposit you need

Once you’ve decided on the parameters of your ideal purchase area, you’ll want to investigate the local market. Jump onto realestate.com.au and plug your criteria and location into a property search and check out the prices. This will give you a good indication of:

  • how much you’ll need to save, and
  • how long it’ll take you to do it, depending on what percentage of the purchase price you want your deposit to be (remember, you certainly don’t have to, but if you have less than a  20% deposit your loan provider will insist on Lenders Mortgage Insurance).

Learn how you can grow your money into a house deposit sooner with Clover’s evidence-based approach to investing here.

Don’t forget to factor in stamp duty into your purchase price. Stamp duty is a state-based tax on the transfer of title to property, and when it comes to real estate it can add several tens of thousands to the cost of breaking into the property market.

Fortunately for buyers in NSW and Victoria, the respective governments in these two states have recently introduced stamp duty relief for first-home buyers.

In NSW, stamp duty now does not apply to new and existing homes valued up to $650,000, or on vacant land up to $350,000.  Concessions will apply to new and existing homes valued at between $650,000 and $800,000, and for vacant land valued between $350,000 and $450,000.

In Victoria stamp duty will not be levied on first-home buyers for properties valued at $600,000 or less. First-home buyers buying a home valued at between $600,001 and $750,000 will be entitled to a concessional rate of stamp duty.

Other states have differing rates of stamp duty, so if you’re in doubt use a service like realestate.com.au stamp duty calculator to find out just how much you could be up for.

Work out how you’re going to save that deposit

The cruelest part of the current housing affordability crisis is that property prices are rising way faster than incomes, and that returns on the ‘traditional’ vehicle of first home deposit saving, the ‘high interest’ savings account, are anything but high.

See: The truth about high interest savings accounts

Sydney and Melbourne house prices have risen 13.7% and 13.8% respectively in the past year, according to CoreLogic. Incomes, by contrast, are rising at 1.9% per annum. You don’t need to be a rocket scientist to see that the goalposts keep shifting away from the average first home buyer.

On the savings front, standard interest rates are currently in the 1.4% to 1.6% per annum range. Jump through enough hoops and you could land yourself a rate around 2.8% at the very high end.

That’s not the rate you keep however. You keep the interest rate after inflation and taxes, so with inflation running at 1.9%, it means someone getting 2.8% and on the 37% marginal tax rate would actually earn a return of -0.14% after inflation and tax.

That’s right, middle to high income earners are currently going backwards even if they’re earning a headline rate north of 2.6% per annum. Not a great way to close that gap between you and your first home deposit.

How do you avoid your money losing value and save for a house deposit faster? Easy. You need your money growing in value at a higher rate than inflation. And the only way that’s going to happen in the current low interest rate environment is if you embrace some amount of growth-oriented investments.

See: What are exchange-traded funds?

It is certainly not without risk, but the question you have to ask yourself is simply this: do I remain in a high-interest savings account and continue to lose money with a high degree of certainty, or do I accept the possibility of some short-term volatility for the potential for real positive returns that can help close the deposit gap?

Only you can answer that question.

And the answer very much comes down to time. How much of it do you have at your disposal?

If you plan on using your money to purchase a property in, say, twelve months, then you should probably just use the best high-interest rate savings account you can find.

But if your first home deposit savings timeline is several years, then you might be better off by putting your money to work in a diversified portfolio, one that can spread your money across many different shares, bonds and cash-based products.

Learn how you can grow your money into a house deposit sooner with Clover’s evidence-based approach to investing here.