Thinking about buying a property and wondering how to save for your first home? We’ve put together a simple step-by-step guide to saving and borrowing for first time buyers, so you can get your finances ready.

Step one: Know the numbers for your savings goal

The deposit

So, how much do you need for a deposit? It’s generally recommended that buyers have at least 20% of the home’s value saved and ready-to-go for a deposit. 

If you have less than a 20% deposit ready, you may be required by your lender to take out Lenders Mortgage Insurance (LMI). This is an insurance policy that protects banks and lenders if you’re unable to meet your loan repayments. 

Yep, you read right – LMI protects banks and lenders (not you) if for some reason you’re no longer able to meet your loan repayments. LMI is often confused with Mortgage Protection Insurance, which is a different product that actually protects you the borrower. If you want to avoid paying LMI, then you may want to keep saving until you’re sure you have a deposit of at least 20% of the value of the type of property you want to purchase, or you can see if you’re eligible to participate in the Government’s First Home Loan Deposit Scheme.

The First Home Loan Deposit Scheme helps eligible first home buyers buy or build a new home with as little as a 5% deposit (and without taking out LMI) as the Government guarantees the loan. 

The hidden costs

When saving to buy a home, remember this: buying a house isn’t just about paying what’s on the property’s price tag, there are extra costs all buyers should be aware of. From conveyancing fees to pest and property inspections to stamp duty and valuations fees.

Some of these costs need to be paid out of your own savings, and you can’t use your mortgage to pay for them. Confirm this with your bank or lender so you know how much you need in total in order to pay the deposit and cover the other hidden transaction costs.

So how much are these hidden costs exactly?

That depends on the type of property you are buying, where it’s located and your circumstances as a buyer. You’ll need to find the information relevant to the state or territory you are purchasing the property in. 

Here’s an estimate of the costs involved in purchasing a property in Queensland for $500,000:

• Property value: $500,000
• Conveyancing and legal fees: $1900
• Stamp duty: $0 for first-home buyers, $15,925 for others
• Building and pest inspection (combined): $500-1000
• Mortgage registration fee: $195
• Transfer fee ($195 + $37 for each $10,000 or part of $10,000 over $180,000): $1,379
• Loan application fee: $500 – $600
• Mortgage protection insurance: $0 (if you don’t want it) – $8000 (per annum)
• Council and utility rates: roughly $500 (per quarter)
• Total costs = between $504,974 and $529,499

Step two: Do the math and calculate what you can *actually* afford to borrow

In a nutshell, borrowing power is all about how much a bank is willing to lend you. A lot is factored into this figure, including your income, your savings, your credit score and more. 

But there’s also an important difference between what a bank will lend you and how much you should borrow. Pouring your entire pot of savings into a mortgage and signing up for loan repayments at the top of your budget means you’ll have little money left over for anything but your loan.

Plus, if interest rates change or your circumstances shift (such as your income is reduced or your expenses increase unexpectedly), you want to give yourself the financial wiggle room to still meet your repayments without mounting financial stress.

Remember: make sure to do your own calculations and figure out what you can comfortably afford first. That way, you won’t let a bank or lender talk you into a mortgage that will be difficult for you to pay off over the long term. It’ll also set your expectations about how much the bank is likely to lend you – most lending institutions have calculators on their websites to help you estimate.

If you already regularly budget, you will know how much cash you are able to set aside each month to pay off a property loan, but if you don’t know now is a good time to start.

Work out what you currently save/spend each month

• Take a look at the last 3-6 months of bank statements and be real with yourself in terms of what you spend and earn each month.

• Consider any upcoming changes to your circumstances that may impact your income or your expenses, for instance: if you’re pregnant or about to change your work situation and income.

Think about how your income/expenses may change with the property purchase?

• Will you be moving into the property? In this case you will no longer need to pay rent if you were previously, however you will now need to pay rates and property maintenance costs.

• Will you rent the property out? If so, you will earn income from the rent, so factor that into your calculations.

Once you understand your current ability to earn, your current expenses and any changes predicted in the future, you should have a clear idea of how much you can set aside each month to pay off a mortgage – you may even find that if you are planning to rent the property, that the rent may cover the additional costs. 

If you’re renting the property as an investment there will also be income tax implications and/or potential deductions that you can make. This will impact your budget, so learn more on the ATO website. 

Do you own your own business?

Things get more complicated when you own your own business and you may find it easier to speak to a broker to support you with the process. Under many scenarios, the lending institutions will add the profit or loss of your business to your income, and will also consider the assets and liabilities of a business. For new, fast growing businesses that are investing heavily in growing and are not yet profitable, it may be more difficult to obtain a loan. 

Step three: start saving!

If you haven’t set financial goals in a while (or ever!), you may like to check out Step 1 of our Money & Mindset program which can help to articulate your values and build an action plan to turn your goals (a.k.a. Owning a home) into reality.

You may have already reviewed your spending and saving as you worked out how much you can afford to borrow. Now, it’s time to use this information to create a plan for how you’ll save for a deposit. The key to creating a realistic budget is to work out:

• What you earn: this includes how much you receive, how often you’re paid and who is paying you.
• What you spend: this means assessing your fixed expenses (things like rent, utilities, groceries, insurance, transport costs etc.) as well as any debts (such as loan repayments or credit card payments) and any unexpected expenses (such as car repairs, medical bills and even vet bills).
• What you save: make sure to figure out how much you can realistically set aside each pay cycle to put towards the costs of purchasing a home. 

Having a clear budget can help you to track your income and head towards your goals. Step 2 of our Money & Mindset program is dedicated to helping you learn how to manage your money and take meaningful strides towards your money goals. Other helpful resources include the Money Smart budget planner and the Verve Wealth Tracker. Find a way to track your spending and saving that works best for you.

First home super saver

Did you know you can also use your super to help you save for your first home? It’s thanks to another government initiative known as the First Home Super Saver (FHSS) Scheme. This Scheme allows first home buyers to make additional personal contributions into their super fund (and withdraw up to $30k plus earnings) to put towards a home deposit. Read more about the FHSS here.

By following these three steps you can be on your way to buying your first property! 

As always, it’s important to do your own research to find a way that works best for you, and seek professional advice as needed.

This blog is published by Verve Superannuation Pty Ltd (ABN 65 628 675 169, AFS Representative No. 001268903), which is a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956, AFSL 238184), as the Sub-Promoter of Verve Super. 

Verve Superannuation Pty Ltd and True Oak Investments Ltd are not licensed to provide personal financial advice. The information contained in this blog, including any financial guidance, is general in nature. You should consider seeking independent legal, financial, taxation or other advice to ensure that your financial decisions are suited to your unique circumstances.

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