Home deposits remain a hurdle for first home buyers

First home buyers remain overwhelmed by the need to save a large deposit for their first home with the revelation that the nation’s average loan size has jumped by 48 percent in the last 10 years.

The nation’s average loan size for first home buyers in 2002 was $151,000, while today it has ballooned to $290,000, according to research house Canstar.

Michelle Hutchison, spokesperson for RateCity, said, “As house prices have increased over the past decade would-be borrowers are required to save larger deposits to secure a loan for an equivalent property. Deposits have reached a point where many first home buyers are struggling to save up enough cash to purchase their first home.”

That said, it is possible to take out a home loan with as little as 2 percent down payment, although the majority of home loans in the RateCity database require savings of at least 5 percent of the purchase price (for a mortgage with a loan-to-value ratio of 95 percent, that is).

However, one serious drawback of having a small deposit is that you may be required to pay an additional charge known as lenders’ mortgage insurance (LMI).

LMI is payable by the home buyer where the deposit on the home loan is less than 20 percent of the property’s value, but this varies between lenders. The upside of LMI is that it enables some people to get a home loan where otherwise may not have been able to secure one, this insurance protects the lender, not the buyer, from loan default, and it can be expensive.

Another way for buyers to secure a home loan is by getting some other person, usually a parent or relative, to guarantee the mortgage. This means that in the event the buyer defaults on the loan (stops making repayments), the guarantor is required to meet the repayments. Clearly, it’s vital the guarantor understands this before signing any documents.

Indeed, new research from Rams revealed just how prevalent guarantors are in the housing market with 53 percent of first homebuyers surveyed saying they had asked relatives to help them put together a deposit.  In addition, 55 percent of those surveyed said they were reducing costs by living at home at the same time as they were saving to buy.

While living at home can be an effective way to save, there are other ways of boosting savings. Financial adviser and chairman of the Australian Government Financial Literacy Board, Paul Clitheroe, says creating a budget and sticking to it is very important.

“Budgeting is a vital part of achieving short and long term savings goals. The great thing about having an effective budget is that it tells you where your money is going, where you can cut back and where you can save. The comprehensive budget planner on the federal government’s MoneySmart website is designed to help those saving for a deposit stay on top of their spending.”

Depositing your money into a high interest savings account can also help fast track a first home buyer’s savings, said Hutchison.

“A high interest savings account can earn you around 6 percent interest on your money. There are many different types of savings accounts out there and first time buyers should shop around using comparison websites such as RateCity.com.au to help find an account to maximise their savings.”

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