There’s no way around it—Australian house prices, relative to income, are at historic highs. Stats suggest our house prices are the second most expensive in the world. Even saving a 20% deposit seems Mission Impossible.
Meet Todd and Renima
Todd and Renima are a hard-working couple in their late 20s. They returned from overseas three years ago. The plan was to get a house ASAP, keep working for a couple of years, and then hopefully start a family.
They’ve been saving hard, but the house—and that house deposit—seems miles off. How can they get a deposit together more quickly before Renima goes on maternity leave?
How much are they saving now?
Todd and Renima’s combined gross income is $110,000—pretty typical for an Aussie couple. Take out tax and super, and they take home $78,856 a year.
They pay $475 a week for their flat ($24,700 a year) which leaves $54,176. They both have a car, which costs more than they realise (the average cost of owning a car in Australia is $8000 annually). Now add $5,000 for utilities (power, phones, internet, water, gas), $12,000 for food (and eating out), and $4,000 for clothing.
That leaves just over $17,000. Now this is a conservative budget—pretty much just the basic food/clothing/shelter scenario. We haven’t considered medical bills, insurance, pet costs, holidays etc.
How much do they need?
If Todd and Renima want to buy a $600,000 house—the median house price in Australia—they’ll need to save a 20% deposit ie. $120,000, as well as pay stamp duty and other costs (lawyers, conveyancers, movers, etc.). Realistically, they might need $140-150,000 all up.
Since neither has owned a house before, they’re eligible for a First Home Owners Grant (FHOG), and stamp duty concession. This cuts their required amount by $25,000.
That’s the good news. But they’ll still need around $120,000. At their current savings rate—and assuming house prices don’t go up—it’ll take them seven years to save a deposit.
How can they get there more quickly?
So what can Todd and Renima do to save their deposit faster? They have a few options:
- Ditch one or both of the cars.
- Look for a cheaper place to rent.
- Go in with a smaller deposit—but pay Lenders Mortgage Insurance (LMI). This is a one-off charge you can pay if you don’t have a 20% deposit. If they put up a 10% deposit on that $600,000 home, LMI will cost them around $12,000.
- Ask family for money, either a loan or a gift.
- Perhaps the best bet is to ask their families if they’d take out a Family Guarantee. This is an official obligation the family will cover the loan should Todd and Renima be unable to repay it. It means they can now go in with a minimal or even non-existent deposit.
Todd and Renima’s Masterplan
Let’s revisit Todd and Renima’s situation. If they opt for a cheaper house, say $400,000, this cuts their required deposit to $80,000. Deduct the FHOG and stamp duty concession—but include legal costs etc.—and they may need just $70,000.
Let’s say they move into a cheaper flat ($400 a week; $20,800 a year), and get rid of a car—a net transport saving of $5000 a year. This takes their net annual savings to $27,000. Lose the second car and they’re up to $32,000.
Move home for a year—and have kindly parents who expect minimal board—and you could add another $10,000 to this.
We’re now looking at two to three years of hard saving—no longer such an impossibility.