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How Much Deposit Do I Need To Buy A House In Australia? | What Are The Upfront Costs?

Is buying a house in Australia with a small deposit possible? Despite common beliefs, entering the property market now is more possible than you might think. I'll break down the upfront costs, including stamp duty, conveyancing, and inspections, and show you how even a modest deposit can kickstart your property investment journey. Keep reading to learn how you can achieve your homeownership goals with smart financial strategies.

Written by
Ravi Sharma
Published on
June 14, 2024
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In a time when everyone is complaining they can't afford to buy a house in Australia, I want to break down how feasible it is to get into the property market now, even when you're starting with a really small deposit!

If you're interested in my thoughts and how you can kickstart your property investing journey, then definitely keep reading…

Breaking Down the Feasibility of Property Ownership with a Small Deposit

When I write blogs and make videos, I often talk about a price point between: $400,000 and $650,000.

Normally, my examples end up being in the average range of about: $450,000 or $500,000.

Sometimes in the comment section, people ask: “Well, where can I buy a house for $500,000?”

This is the exact reason why I needed to make this article! I want to share information that's out there that most people don't have access to.

Now, you might be reading this, talking to yourself, saying: “Yeah, I already know about this stuff.”

But there are so many of you out there who are unaware of what's happening on the other side of Australia. If you are on the western seaboard, you're looking at what's happening on the eastern seaboard and if you're in a metro city you only look at your backyard, you're not aware of what's happening 3 to 4 hours down the road.

Real Numbers Speak Louder Than Words

So let's jump into some numbers now! For this example, we have:

  • A home you can go in: $450,000 
  • Deposit: 10% or 12% 

A 12% deposit is equivalent to $54,000. Whereas, a 10% deposit is equivalent to $45,000.

Difference between 12% and 10% deposits

Upon reading this, you may ask me: “Well, why am I putting it at 12% when you just said I can go and leverage my money at 10%?”

To answer your question: That choice is completely up to you.

But what I found is that: When you put in that extra 2%, You get into where this golden ratio really kicks in with LMI (Lenders' Mortgage Insurance), which is something you have to pay when your deposit is less than 20%.

Say in this example:  You went ahead and put: 10% as a deposit

So…

Your LMI cost is $10,000.

LMI cost for 10% deposit

However, if you simply put an extra 2% in, your LMI drops from 10,000 down to 6,300.

LMI cost for 10% deposit plus extra 2%

As I'm crunching the numbers, I find myself thinking: "This just makes a lot of sense!"

But I’m NOT saying that you can't go out there with a 10% deposit. That’s why you need a good mortgage broker on your side. 

You would not believe how many people have emailed me saying: “Hey! My mortgage broker told me I can't put in less than a 20% deposit.”

Honestly, it's disgusting that some brokers possess such a low level of knowledge and proceed to spread misinformation. It honestly is so disheartening because it often prevents people from taking action

This leads to significant regret down the line. That's why I try and advocate for us to share more articles like this so that more people know how we can actually go and make moves towards our financial freedom.

Additional Costs: Stamp Duty, Conveyancing, and Inspections

Stamp Duty

Now, for this illustration, let's assume: a 12% deposit 

Next, you will encounter stamp duty.  Let’s say, for example:

  • We buy a property in Queensland.
  • The stamp duty is going to be about $15,000.

After that, you will then have conveyancing. 

Conveyancing

What is conveyancing or a conveyancer?  To put it simply: A conveyancer essentially reviews the contract on your behalf, ensuring that ALL the necessary details are thoroughly checked and confirmed.

 Their job is mainly to:

  • Review the contract;
  • Ensure that all of the conditions that you wanted in that contract are in there; and 
  • Make sure that changes or anything that comes up is properly communicated.

Therefore, you're not left in the dark and potentially get screwed over by the vendor. In addition to the conveyancer, you're probably going to go and get a pest and building inspection.

Pest and Building Inspection

Now, a pest and building inspection is going to cost you about: $1,100. But it depends on where you're getting this done. 

I've heard as low as $400. I've heard as high as $2,000. So it really just comes down to:

  • Who you're picking; and
  • Which location you're actually purchasing in.

I have never purchased a property, whether for myself or on behalf of the numerous clients we've assisted, without including this crucial contract condition: A thorough pest and building inspection, and it needs to be to our satisfaction.

Now, you might think: “Nah, that's not really important.”

But believe me: IT IS IMPORTANT!

Why? Allow me to explain…

You could walk through that property and think: “Wow, this is absolutely amazing!”

However, you have no idea what's happening:

  • Behind the walls;
  • Underneath the ground; and
  • The fencing.

These costs can add up later. That's why you hear so many stories of nightmares people have with rental properties. All these nightmares are because they ended up buying something where they didn’t do the proper due diligence.

So what happens next?  Well, they find themselves having to pay so much in the first year and they're like: “I'm so done with this! I'm selling my property and I'll never touch real estate again!”

I'm sure you know someone or you've probably gone on Reddit and heard about these stories. This is why it's so important to avoid questionable deals upfront.

If the property smells fishy,  you wouldn't want to live there, and potential tenants wouldn't either. So if you come across a deal that seems too good to be true, chances are, it probably is. There's likely something being hidden, which is why understanding your rights and the contractual conditions is important as these will help protect you.

If you need help with finding a conveyancer, definitely email me now at team@searchpropertyau.com.au.

The final fee, which is actually optional, is a buyer agent fee, amounting to $16,000.

You might wonder why you should consider this. But the truth is, I'm not here to convince you to purchase the service.

Instead, I aim to educate you on the role of a buyer agent.

Understanding the Role of a Buyer's Agent

The reality is: Most people will use a real estate agent and say: “They're helping me and it's free!”

To tell you honestly, if you are not paying them, they are getting paid from somewhere else. 

If they're getting paid from somewhere else, guess where their intentions lie? Of course, with that other person—the seller. They need to serve the seller because the seller is paying them a percentage of the sale price.

This means: The higher the price, the higher their fee!

They have actually NO incentive to help you get the best price.  Therefore, if their pay is determined by how high the sale price is, why exactly would they help you as the buyer to reduce the price? It is actually going against what their intentions are!

Real estate agents are incentivised to get the highest price. Whereas, a buyer's agent does the opposite for you.

Now, I can't really talk about anyone else and how they run their agency. But for us, it is a fixed fee and the whole idea is: We want to go in there and get the best value for the client.

Why? Because chances are: If you do really well on the first one, you're giving us a call to purchase your second one!

Yes, we get a fee on every property. But that also gives us an incentive to get you the right property. Trust me when you look at the numbers, you'll realise that fee is so small compared to:

  • What you'll make in the next 5 years when it comes to capital growth; 
  • Having the peace of mind to do this properly;
  • Get started with speed; and 
  • Know that someone was there to guide you the whole way through.

Breaking Down The Total Cost 

I know I may have said a lot, but let's continue…

Now, let’s talk about another additional cost, which is the Lenders' Mortgage Insurance (LMI). Using the previous numbers as an example, it now brings the total to $88,000, excluding LMI.

In short, you will need: $88,000

To get you a property that's worth: $450,000

Now, you might be sitting there and saying:

Well, I don't want to pay LMI. It's an unnecessary cost.”

“I'm trying to reduce all of my upfront costs.”

This is where we need to take a pause and think about that mindset.

If your mindset is to go: “I want to save” or “How do I save a dollar here?”, you're basically in a contractionary mindset.

But if you have an open growth mindset, you will say: “Okay, if I'm spending this money, I'm okay spending it if I can make more!”

You see the difference?

In the first mindset, you're trying to save more.

In the second mindset, you're trying to make more.

One thing I can promise: If you spend time training your mindset to shift from saving more to making more, your life will completely change.

You can only save 100% of your salary, right?  If the income you make is $100,000, you can save a maximum of $100,000.

Now, of course, there are taxes and things like that. If you're left with $100,000, that's all you can ever save!

But consider this: If you make $100,000 and pick up a side hustle, that brings in an extra $20,000!

So even after paying extra taxes, you're still left with more. You’ll realise that your earning potential is unlimited. Compare this to just having the $100,000, your savings is capped.

This mindset shift changes the way you look at investing.

Understanding the Lenders' Mortgage Insurance (LMI): Is it Worth Paying?

Now, let's talk about LMI. If you're thinking: “I don't want to pay LMI,” all you have to do is save a 20% deposit.

In this case, you would have: $45,000, which is 10%.

You would need to: Save another $45,000 to purchase this property and avoid paying LMI.

But in effect, you'd have to wait almost 2 years, if not longer, based on a savings rate of $2,000 per month. It is because it will take that long to accumulate the additional $45,000.

So, $2,000 a month for 24 months equals about $48,000. By choosing not to pay LMI, you've delayed entering the market by 2 years.

Now guess what! You could probably do that, and in 2 years' time, that property that was $450,000, at a conservative 5% growth rate, would now be worth close to: $496,000.

At that point, if you wanted 20%, you would have to wait another 3 months to be able to get to $99,000, which is about what you need as a 20% deposit for that property.

I know I just threw a lot of numbers out there for you.

But the reality is: speed is the key.

I've had the opportunity to go in with 10% or 20%, and I've always chosen the lower amount. That's simply because it allows me greater leverage.

If I can go in and say a property that I can now control cost me: $45,000

Versus: $90,000,

My return on investment is twice as much! Instead of controlling a $450,000 house, I can now control $900,000 worth of property.

Time in the market is how the rich get filthy rich. That's what you're wanting to do.

You're not coming out here and saying: “Hey! It would be nice to have one investment property and then I'll retire and I'll still only have like $300 a week to my name.”

That's not rich! Trust me, you're not going to sit there and be like: “I feel rich!”

What you want is to be filthy rich, and the truth is you only need two properties to be able to get there. Want to know how?

Keep reading.

Calculating Cash Flow

Now, let's look at cash flow for a property at this number.  I will show you a real life example of a property we picked up recently for a client.

Client deal secured 5.9% yield

What we got here is a: $457,500 home. Yes, a little higher than the $450,000 I used earlier as an example. But this property rents for $525 a week 

The market value was assessed at: $466,500 

This means the instant equity was about: $9,000 

And we expect the return on investment to be about: 15% in the first 12 months 

We also expect the growth to be greater than: 7% in the first year 

But for the example we use 5% very conservatively.

Now, let’s examine the cash flow perspective. After factoring in property management fees, that $525 per week I mentioned earlier now becomes: $483.

Which when annualised amounts to: $25,100 per year.

Cash flow perspective from $525 property

Now, the costs would include rates and insurances which is worth about $5,000/year.

Then you have interest repayments. So, if you went in at 88% on this loan, then your interest at 6.5% would work out to be: $26,169 per year 

Calculation of interest from reits and insurances

When you consider your total expenses, that amounts to: $31,169.

When you subtract that from the rent you're receiving, the negative cash flow of $6,053 per week is actually only $116.

Now, that's before any deductions, tax returns, or accounting for any depreciation. Once you consider all of those factors, you're pretty much close to neutral, if not slightly negative.

The reality is: With interest rates at 6.5%, if you're still getting to a point where you're only spending about $100 per week out of your pocket in year one at an 88% lend, you are cheering!

Because after year one, you will have your rents increasing!

Even if interest rates don't drop at all, you might find yourself in a position where you are slightly positive after your tax returns.

Within 24 months, you're almost definitely positive, especially if interest rates start dropping even by 25 basis points.

What’s the key to all of this?

Simple. The key is to be able to purchase the right property.

I can't stress that enough. Simply going out there and saying: “Well, I'm just going to invest anywhere and just hope for the best.”

It will probably work out because you convince yourself it's a long-term game. So you go: “Well, it doesn't matter if I've lost money. If it went sideways for 3 years, it's okay; in 30 years, I'll be further ahead.”

But the reality is: you want to do this properly.

You want to retire filthy rich—not just rich like some people think they are.

In order to do that, you need to:

  • Pick the right property in the right phase of the market cycle; and 
  • Ensure it gives you rental growth as well as capital growth.

I would much rather: Go out there and purchase three of these types of properties in three different locations.

This strategy allows me to:

  • Diversify my risk;
  • Increase my cash flow; and
  • Avoid having to concentrate all of my risk in one property, purchasing it, and then telling myself: “It's not my forever home.”

Let's face it: it's going to end up being an investment that incurs a $30,000 negative cash flow every year and despite all that, I still can't afford to buy anything.

That's my thesis around investing. I believe investing can be enjoyable and allow you to maintain your lifestyle without making compromises.

So, if you're interested in learning more about how all of this works, schedule a free discovery call.

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