It takes an average of just over six years to save for a 20% deposit for a house in Sydney, according to Domain’s First Home Buyers Report for March 2019.
It’s less in Melbourne, where it takes five years and nine months, and lower still in Brisbane, where the average time frame is just four years and three months (figures are based on entry-house values and the average income of couples aged between 25 and 34 years old, with each party saving 20% of their monthly income after tax).
Whether the thought of missing out on an opportune time in the market is playing on your mind, or you’re aiming to secure your next property by a certain milestone, collecting a deposit within the tight time frame of 12 months can mean striking the right balance between strategy and risk.
“I would only put a 12-month timeline on it if that serves what you’re trying to do,” says Bryce Holdaway, co-host of The Property Couch podcast.
“If your time frame is short, you will likely need to use a number of strategies to collect a deposit, as saving alone may not be sufficient”
“If you are already someone who has an investment property, and it means you won’t be able to buy another one for another three years, that’s OK. Don’t put yourself under enormous pressure to buy one, because the end goal is to self-fund, to get a passive income from [the property] that you’re happy with.”
There are a variety of strategies for gathering together a 20% property deposit in just 12 months, and in addition to the risks that come with each strategy, there isn’t a one-size-fits-all solution.
Betsy Westcott, co-founder of Ladies Finance Club and director of retail banking at Xinja Bank, says for most people “saving enough money to buy property is a marathon, not typically something that is achieved in a 12-month saving sprint. In saying that, it’s not impossible, and I know people who’ve done it.
“If your time frame is very short, you will most likely need to apply a number of strategies to collect a deposit, because saving alone may not be sufficient.”
LMI: Friend or foe?
Getting there depends on the value of the property, an investor’s income, their fixed expenses and their ability to save, explains Westcott, who values lenders’ mortgage insurance (LMI) for giving buyers earlier access to the market.
However, because it is an insurance premium that solely protects the bank if the borrower defaults on the loan, she believes it’s an additional expense that provides limited benefit.
“It doesn’t contribute to your deposit or purchase costs, and you don’t get it back later once the LVR hits 80%,” Westcott says.
An opportunity to bring down the weight of the deposit could be explored by expanding your scope to buying in regional markets, in suburbs that show strong rental yields and proven long-term growth but are located outside the bounds of the capital cities.
“It’s about harvesting that equity so you can use it to provide the 20% deposit plus costs to settle on an investment property”
“If the price of a property is $500k, you’re looking at a deposit of $100k plus stamp duty. To be able to save that in cash in 12 months you’re going to need to be on a very high salary and have minimal personal expenses,” Westcott says. “If, however, you’re looking at a property in a regional town and, for example, it’s priced closer to $200k, then your deposit is closer to $40,000 plus stamp duty, which is much more achievable.”
According to Holdaway, investors need to be “looking at the bigger picture” to find “conservative, creative” ways to enter the market.
“If you are buying into a market that’s growing faster than you can save, you need to look outside the square,” he says.
Deciding on a strategy also has a lot to do with profiling yourself as an investor.
“What is your appetite for risk?” Holdaway asks. “Are you comfortable with debt, or does debt make you uncomfortable? Once you have self-assessed, then you can work out where you fit in the mix [of strategies].”
Unlocking the wealth that exists in your primary place of residence is the most commonly used means of accessing a deposit, because of its straightforward approach, Holdaway says.
“You’re more in control of your own destiny. It’s about harvesting that equity so that you can use that to provide the 20% deposit plus costs to settle on an investment property,” he says. “It largely means that you can act straightaway; there is no saving that’s involved. It’s really just down to whether or not you qualify for the lending.”
The process of accessing available wealth starts with revaluing your current property, and if it has increased in value or you’ve shaved off a portion of the loan, there may be equity that can be tapped into.
Westcott adds, “You can essentially borrow 100% of the new property’s purchase price – 20% deposit from your equity, and the 80% borrowing. Of course, the borrower will need to be assessed for their ability to service the total borrowings.”
“[A joint venture] must be approached with care and caution because the dream can quickly become a nightmare when things go wrong”
But according to Holdaway, investors shouldn’t confuse the straightforwardness of this strategy with “easy money”.
“It’s only a really small part of what it takes to buy an investment property,” he says.
“How comfortable are you that you’re not buying a property that’s going to go down in value quickly? If you invest in a speculative mining town, for example, and all of a sudden you’re in a negative equity situation.”
Holdaway recommends that investors employ the advice of an “investment-savvy mortgage broker” who is attuned to thinking about the next opportune move, when setting up the loan for your first purchase.
Property joint venture
If building a 20% deposit on your own in 12 months doesn’t seem feasible, then joining forces with a like-minded investor could mean splitting the costs of the deposit, pooling resources to collect a more substantial one, and benefiting from earlier entry into the market.
“This strategy must be approached with care and caution because the dream can quickly become a nightmare when things go wrong,” Westcott says.
“The risk is that you have to share the rewards – both the income and capital growth – of the investment, and you may not have complete autonomy to sell out of the investment when you want to. You might not think you’ll ever sell, but chances are that you or your co-investor will want to cash out at some point. It could be triggered by a change in personal circumstances, a desire to use the equity in the property to purchase independently, or the property reaching a milestone, such as a particular price.”
Holdaway says the biggest reward generally comes from a long-term partnership. “You want to create incentives for people to stay, but also a disincentive for them to leave early.”
Joint venture investors should also note that while they may only own a portion of the property, they will still be “jointly and severally liable for 100% of the loan”, which can impact on their future borrowing capacity.
And while entering into a joint venture with a family member instils a sense of comfort and trust in the partnership, Holdaway warns: “It’s the strength going in, but you don’t want it to be the weakness down the track when problems happen because you haven’t clearly defined the [contractual] rules of engagement at the very beginning.”
It’s the co-investors who regularly review their plans and exit strategy that have the best chance of success, Westcott adds. “As a rule of thumb, aim to review the property performance and whether either or all parties wish to exit, on at least a yearly basis.”
The family lender
Another option is for a parent to act as a guarantor for the loan and cover the 20% deposit, Holdaway says, which can be a limited guarantee up until the time that the value of the property surpasses the deposit.
“At that point, the parent’s house will be removed as security, and that means that mum and dad will have given you a leg up,” he says.
However, in the case of the borrower defaulting on the loan, this can create a world of pain for all involved.
“The parents might find themselves having to service the loan or even sell an asset to repay it, which could spell financial hardship for the parents,” Westcott says.
“Like in any financial arrangement all parties to the agreement should seek independent financial and legal advice to make sure it is appropriate for them before they enter into it. Parents and children should be very clear about the parameters of the arrangement and, ideally, write it down.”
If a parent decides to loan the deposit rather than give it as a gift, the borrower is legally required to inform the lender of this arrangement.
With so many potential risks and complexities, Westcott believes that taking the time to build your deposit yourself, rather than turning to your parents or a joint venture partner, may offer more rewards.
“You’ll have full ownership of the property, including the benefits of any capital growth and income. You have the autonomy to independently make decisions relating to the property, such as who to let it to and when to sell,” she explains.
A concentrated amount of research and thought can go into developing a strategy for entering the market within a 12-month period. As Holdaway says, “Investment property is a process, not an event; there’s plenty of lead-up to the purchase, and there is plenty to consider once you have purchased.”