I still believe in the Great Australian Dream of owning your own home.
However, I’ve also seen the dream become a nightmare for many first home buyers, who catch Hills Hoist envy and take on too much debt.
That’s why my golden rule for buying your first home is to save a 20 per cent deposit.
Let’s be honest, saving up a 20 per cent deposit is a huge job for most people. (But it won’t kill you, and you will achieve it. I meet people who do it everyday).
Why 20 per cent?
Saving a 20 per cent home deposit proves (to yourself, as much as anyone) that you’re a good saver. But the main reason is that having a 20 per cent deposit will mean you won’t be hit with lenders’ mortgage insurance (LMI).
LMI is the bank’s insurance against you not being able to make your repayments.
And you pay for it.
And it’s very expensive.
If you buy a $500,000 home with a 5 per cent deposit, you’ll pay LMI of $15,722.
It gets worse: because you’ll have to tack the LMI onto your loan, it’ll end up costing you around $30,000 by the time you’ve paid off your mortgage.
Remember: this insurance doesn’t protect you—it protects the lender.
It’s a total waste of money.
How to save a 20 per cent deposit in 20 months
First, the easiest way to make money quickly — as in next week — is to to start a side-business or freelance on the side, around your current day job (think becoming an Uber driver, getting gigs via UpWork, or consulting in your current industry).
Freelancing on the side creates an extra income stream that will really turbocharge your deposit.
Second, save like crazy. The average full-time pre-tax wage in Australia is $78,832, or $5000 a month in the hand (excluding super). So a couple both earning average wages could live off one income (very frugally) and save a $100,000 deposit in 20 months.
But hold your horses.
Saving a deposit is like the Socceroos beating Togo to qualify for the World Cup. It’s the beginning of the campaign, not the end. In other words, you want your mind to be set on owning your home outright, rather than just limping over the line with a deposit.
So don’t set up impossible savings targets that you won’t be able to sustain in the long run.
Find out the five real estate mistakes most first homebuyers make, plus everything you ever wanted to know about making the biggest purchase of your life, in my brand new book, The Barefoot Investor: The Only Money Guide You’ll Ever Need. Order your copy here.