So you’ve decided it’s time to buy a home and take that important step towards becoming a financially responsible adult. You jump online and run the sums. Reasonable income – tick. Houses in your price range – tick. Savings...BIG problem.
After not very long you realise that most banks require a 20% deposit, something that can be reduced down to 5% if you spend thousands more on Lenders’ Mortgage Insurance. And then there’s the other fees and charges, including stamp duty which can run into tens of thousands.
Things are looking pretty dire. In order to buy that $430,000 house, you’re going to need savings in the vicinity of $110,000, not that $500 sitting in your savings account that you’ve managed to scrounge together from last year’s tax return.
A decade of scrimping and saving
We’ve run the sums for you, and on a $430,000 home – Adelaide’s median house price – if you are earning South Australia’s median income ($73,611.20), it’s going to take you somewhere in the vicinity of nine years to save the sort of money required by mainstream lenders.
If you take-out Lenders’ Mortgage Insurance (a type of insurance that protects the bank, not you) to reduce the deposit size, it’s still going to take you close to five years, and cost you about $15,000 more.
The fastest way into home ownership
That’s the bad news. The good news is there are ways to slash the amount of time it’s going to take to break into home ownership, you just need to know how. We ran a number of scenarios using SA’s median house price ($430,000) and median income level (putting away 25% into savings) and here’s what we found:
Hands-down, the quickest way into home ownership is to take a house and land package with HomeStart Finance. Requiring just $13,409 upfront, you could be in your own home in just 12 months. Building with HomeStart comes in second best, at less than two years and taking advantage of the stamp duty savings and Government Grants that are available when building. Buying an established home with HomeStart was next best (at 2 years and 9 months). Getting finance through a mainstream lender, whether you’re buying established or building and even with lenders’ mortgage insurance applied, is going to take more than 4 years.
The reason for HomeStart coming out trumps isn’t rocket science – it offers low deposit products (3% for buying established and 6% for building), and doesn’t charge Lenders’ Mortgage Insurance. Throw in package deals it has established with builders, and you’ve got a pretty compelling offer.
Here’s the full analysis:
How did we do the maths? Saving time was based on earning the average net household income of $4719 a month, and putting away $1,179.75 of that towards saving for your home (based on 25% of average household income being saved). These scenarios are an estimate only, and provided for illustrative purposes only. They do not constitute a quote or an offer. Build scenarios assume customer is a first home buyer (eligible for the First Home Owner Grant). HomeStart scenarios assume customer is eligible for the Graduate Loan. Mainstream lender scenarios are based on ANZ online calculator, used 11/10/16. A consistent conveyancer cost was allowed for in the ‘Other fees & charges’ of $1,500, for both Mainstream Lender and HomeStart calculations. Customer may pay less or more when they contract a conveyancer or solicitor. ANZ web calculator actually allows for $600, HomeStart web calculator allows for $2,500.
Here’s the kicker
We know what some of you may be thinking – ‘I don’t want to build out in the sticks, I want to buy inner-city’. That’s a pretty common view, but before you dismiss this article, consider the following.
In the 10 years between 1993 and 2003, house prices in Adelaide doubled (grew by 103% to be exact). If that happens during the 5-10 years you’re saving your deposit, you could be eating two-minute noodles and toast for dinner until somewhere around 2030.
And if you think today’s housing market is very different from the 1990s, consider the Sydney market where house prices have risen by 75% since 2009 (7 years).
Banking on subdued capital growth while you save your war chest is risky. Even at relatively minor capital growth of 3% each year, a $430,000 house is going to be worth $480,000 after 4 years. That means by the time you reach where you thought you needed to be, your goal will remain a couple of years away.
The message here is that when it comes to the housing market, it’s all about getting a foot in the door. Your first home doesn’t have to be your forever home. Once you’re in and building equity and capital growth, you’ll be far closer to that inner-city pad on the doorstep of your favourite coffee shop than if you’re still plugging pennies into your piggybank.
The fastest way to your own home