Buying your first property: How to tackle the deposit hurdle

Buying a home has always been the Great Australian Dream, but making this dream a reality is becoming increasingly difficult for hopeful first home buyers and investors alike.

Making matters worse is the fact that prices soared throughout the Covid-19 pandemic. CoreLogic data shows that property values have increased, on average, between 16.7% and 25.4% over the last year.

But that doesn’t mean buying a property is necessarily out of reach.

Furthermore, current market conditions might help you get into the market. Why?

Because lower interest rates means greater borrowing power.

Assistant Governor of the Reserve Bank of Australia (RBA), Luci Ellis, says that low interest rates have allowed borrowers to service higher loans. At the same time, they’ve pushed prices up.

“The price increases were greatest in the most desirable regions and neighbourhoods,” she said, “so, first home buyers [may] now have to save a bigger deposit relative to their incomes.”

What this means in practice is that your borrowing power is higher, and you should be able to get a loan that is higher now than you would have qualified for 2 years ago. For instance:

  • In 2019 or early 2020 when interest rates were around 4%, you might have qualified for $500,000 in finance.
  • But with interest rates now down at around 2% to 2.5%, your borrowing power could have shot up to $600,000.

The key to getting into the market is to work out the best way forward for your unique situation. And that process generally starts with looking at your deposit.

Getting started – saving a deposit

Many young people have had the idea that they need to save a 20% deposit to buy a property drummed into their heads by well-meaning friends and family.

But the fact is, saving 20% of the purchase price for a home in Melbourne or Sydney could take more than a decade – by which time house prices could have shot up again, moving that goalpost further away.

So, unless you’re earning a large income, or are able to live rent-free with family and channel all your earnings into saving for a deposit, the speed at which you can save is likely to be outpaced by the speed of growth in the property market. 

Fortunately, there is an option that doesn’t require homebuyers to save a 20% deposit – you can elect to pay Lender’s Mortgage Insurance (LMI), and get into the market with as little as 5% deposit saved.

Provided you have the income to service the mortgage repayments, you could secure a property with a much lower deposit than you thought. You’ll have to pay LMI in addition to your loan amount, but many consider this a small price to pay to be able to get into the market sooner.

Here are a few ways to get into the market, without waiting till you have a six-figure deposit saved up:

  • Apply for the First Home Loan Deposit Scheme and buy a home with a 5% deposit.
  • If you’re lucky enough to have family or friends who can gift or loan you part of your deposit, or parents who are willing to act as a guarantor, that can help enormously – you’ll avoid paying LMI altogether if it bumps you up to a 20% deposit.
  • Consider rentvesting. Rentvesting involves investing in a property you can afford right now (in a cheaper area, or an apartment instead of a house) and renting it out. Meanwhile, you continue to rent the property of your choice, in your desired area.

Rentvesting is a great option for people who have been priced out of the area they’d like to live in, but who are still keen to get onto the property ladder before prices increase even further. They can continue saving for their dream home, with the growth in value of their investment property contributing to their eventual deposit.

While rentvesting isn’t for everyone, we’ve worked with a number of clients to help them begin their property journey using this strategy.

Learn more about rentvesting in just 8 minutes: My chat with The Real Estate Podcast here

There are other things you can do if you’re feeling disheartened about saving a deposit, too, like considering a joint venture with a friend and pooling your funds and buying a property together.

The bottom line is, we all had to start somewhere but most importantly is that you start – so keep going! By working with an experienced property expert, we can help you look at all the different options and create a plan that is tailored to you and your own personal situation and goals. To see what’s possible, contact our friendly team today.