How to Save a Deposit & Buy Your First Home
There is not much online specifically for Australian doctors buying their first home, especially outside banks or mortgage brokers trying to sell you their products. There are some specific differences to others buying a home, including the fact that doctors often move frequently for training and can get lenders mortgage insurance (LMI) waived. If you are saving (or have saved) for that elusive deposit, add your tips for other savers at the bottom of this post! For those saving to buy in Melbourne or Sydney, the challenge can be daunting, but after the recent correction, these markets are more affordable than they have been for many years.
Before we start, are you absolutely sure you want to buy a home? This is a huge financial commitment which can build wealth or slow your journey to financial freedom. Read this article (including a buy vs rent calculator) to check you’re making a well informed decision to buy.
How Much Can I Borrow to Buy a Home?
Most of us want more house than we can or should afford, it’s human nature. Some doctors buy so much house they are cash poor and suffer financial stress despite their generous pays. I personally hate the idea of financial stress, and highly value the ability to take time off at half pay, and plenty of cash left over for holidays and fun. I understand this is extremely challenging in the bigger cities, and is also a personal value decision.
Committing to a huge mortgage can pay off if you buy an excellently located property. It paid off for many of our parents 30+ years ago, but the return is not guaranteed. Most home buyers feel they have to make compromises to buy a home they can love with a manageable mortgage.
When considering how much house you can afford, think about:
- Are you planning to have children and reduce to one wage for a period?
- Do you plan to have children and want to be in a good public school district?
- Are you going to have to move for training in the next 5 years?
- Do you plan on a fellowship or time working or traveling overseas
- Look at the picture for the next 5+ years to work out what are your priorities
With the above in mind work out how much of your monthly pay you are willing to pay towards your mortgage. There is a great mortgage calculator for this on the Money Smart website.
If the area you are buying in is a great capital growth area, then you could perhaps consider your principal place of residence an asset. You can find historical 10 year average capital growth and also demand to supply ratio (an indicator of likely near term growth) at Your Investment Property.
Extra Costs of Owning vs Renting
Rates are based on the value of the property, and differ according to which state and council you’re property is in. The average home owner will pay $2000-$3000 per year in rates. You can look on the local council website to get a rough idea of rates in your area.
Maintenance costs are unpredictable. 1.5% of the property value per year is often quoted for maintenance, but repair costs come in unexpected lumps. Your hot water heater may die the day you move in, so it’s important to have some cash saved just for emergency repairs.
Home insurance, life and Total permanent disability and income protection insurance become more important when you take on lots of debt, consider how much you need and whether the premiums will need to increase when you buy your home.
Where to Keep Your Home Deposit Savings
Online High Interest Savings Account
The easiest, simplest and lowest risk choice is to find an account with $0 fees, and a reasonable interest rate. At the time of writing ME Bank offered 2.2%.
If you can be bothered opening multiple accounts, its possible to get a slightly higher interest rate (2.6% currently) for an introductory period – and move your savings from one bonus introductory account to another every few months.
Check the conditions and assess whether they are suitable. Some accounts require a number of EFTPOS payments, others require an amount deposited monthly, without withdrawals, in order to achieve the advertised interest rate.
One other thing to watch for, the banks can change your interest rate, and in my experience don’t let you know.
If you already have a lump sum saved (at least $1000), a term deposit will give you a fixed interest rate (which may be advantageous if rates drop further), but lock your money away for a specified amount of time. At the moment, a brief search for term deposits indicates they pay less than the above interest accounts, presumably because interest rates are expected to drop further. These can become more attractive when interest rates rise.
First Home Savers Scheme
You can contribute voluntary payments (up to $15000 per year and $30000 total) to your super account through salary sacrifice or a tax-deductible contribution.
You will pay 15% tax on contributions as long as the total contributed per year is less than $25,000 and you earn less than $250,000 per annum.
The ATO will tax contributions and (artificially calculated) earnings at marginal rate minus 30% at withdrawal. If you are in the 37% tax bracket, this will mean ~$6200 saved in tax that can go towards your deposit instead.
The best resources I have found on this are Super Guide and the ATO website. It can take up to a month to withdraw your money, you must purchase within 12 months of withdrawing the money, and you must live in the property for at least 6 of the first 12 months you own it. I think the FHSSS ideal for those with plans to buy their first home within the next 2-5 years.
Investing outside the above options, for example in the stock market is only really an option if you don’t have your heart set on buying your home within a specific time frame. If you were to invest in index funds, for example, you may get a much better return than from a high interest bank account or term deposit, but with much higher volatility. If the stock market were to drop by 50% it could take months or years to recover.
Peer to Peer Lending
Money can be lent directly to individuals via a platform such as Ratesetter. Rates of interest are higher (currently 3.5-7.7%) but there is no guarantee you will get your money back. So far all loans have been repaid by borrower or the platform but if a large number of borrowers were to default on the loan investors would lose their money. This is too risky to be recommended, especially when you are saving for a home.
What to Do While Your Saving - Optimise Borrowing Capacity
Since the Royal Commission, when assessing borrowing potential, banks scrutinize your spending in detail. You will be cleaning this up to save, but especially in the 6 months leading up to mortgage application it is helpful to make financial records as self-controlled as possible!
Credit card limits (even if you don’t use them or pay them off every month) can reduce the amount banks will lend you, so consider reducing limits or closing credit cards you don’t use.
With some time up your sleeve, it’s worth applying for your credit score. You can obtain a free annual credit score from Equifax.com.au and keep track of your score monthly on creditsavvy.com.au.
Make sure all your bills and credit cards have direct debits set up so you never miss a payment and reduce or clear existing debts if possible.
HECS debt can reduce your borrowing power, due to repayments but it is the cheapest available debt and I would only consider paying this off if it is stopping you from being able to buy.
How to Save a Home Deposit Faster
This is how I got into my first property, still in medical school. If parents are willing to help out, this is a MASSIVE step up. If mum or dad have equity in their home, they can offer that as extra security for the kid’s loan.
Going guarantor is not risk free and requires a lot of trust between parents and offspring. If the child defaults on the loan, the bank will sell the home, but if there is a shortfall the parents will be liable. The guarantee can be limited to the 20% deposit amount to reduce liability for parents, but will save paying LMI if your unable to get out of it any other way.
First home buyers scheme
This is another way to get onto the property ladder with a minimal deposit. Singles earning less than $125,000 or couples earning up to $200000 can apply for one of 10,000 places on the first home buyers’ scheme. The remaining 15% deposit is covered by a government guarantee, meaning no LMI. The scheme starts January 1st 2020
How To Buy Your First Home
See a Mortgage Broker for a Pre-Approval
Start this process before the house hunt begins. You will want to know realistically how much you can borrow, and be able to submit offers fast when you find the perfect home.
Do you want fixed or variable rates? With rates at an all time low, it seems reasonable to lock in, especially if you will be stretched by an increase in rates.
Over the long term the banks tend to win this game, and price their fixed rates to ensure they profit despite future changes. If you can afford a 3 % increase in rates you are probably better off with variable.
Compare set up and ongoing costs between loan alternatives, as well as interest rate (watch out for the “introductory rate” which jumps after a certain amount of time ).
Now comes the fun bit! Good luck! Try to think ahead a few years, as needing to upgrade your home will cost lots in fees (6% buying + 2% buying).
When you have found the house you love, paid a deposit (often 10%) and signed a contract, remember to get insurance for your new home immediately. If the house burns down between signing the contract and exchange, you want to be fully insured!
Income protection, life and TPD insurance become more important with a large amount of debt. Look at some of the terrible luck your patients have had. Severe accidents, life threatening illness and untimely death can all happen to healthy young people.
Consider the needs of your family if you were to die, become permanently disabled or no longer able to provide an income. Same for your partner if you have one. Then organize insurance. Income protection is tax deductible, and all insurances will be cheaper if organized younger before collecting any co-morbidities.
I hope this step by step-guide of saving for and buying your first home has been helpful. What tips can you share on how to save more cash for your deposit? Comment below to help out other Aussie docs with your great ideas!