First Home Buyers in Australia: Should You Break Your Term Deposit?
Thinking about breaking your term deposit to buy your first home in Australia? That’s a big decision many first‑time buyers face, and there’s no one‑size‑fits‑all answer. Term deposits offer safety and fixed returns, but they come with rules about early access, especially if you’re planning to use that money as a home deposit.
The main thing to remember is this: breaking a term deposit early usually comes with penalty fees or reduced interest, which can eat into your savings. You need to carefully balance these costs against the benefits of entering the Australian property market sooner rather than later.
Understanding how term deposits differ from other savings options, and knowing the government schemes available to first‑time buyers, helps you make a more informed choice.
Evaluating the Financial Impact of Breaking a Term Deposit
A term deposit locks your money away with a bank for a fixed period in exchange for a guaranteed interest rate. If you withdraw that money before it matures, banks in Australia generally charge penalties, either as a fee or by reducing the interest you’ve earned.
This penalty can vary depending on:
How early you withdraw your funds
The bank’s penalty structure
The interest rate you originally agreed to
Before you break a term deposit to buy a house, list out exactly how much you stand to lose in interest and fees. Then compare that to how much it would help you get into the market sooner. In some property markets, even waiting a few months can cost significantly more in home price increases, so this calculation is crucial.
Understanding Early Withdrawal and Its Penalties in Australia
Different Australian banks and financial institutions have varying policies on early withdrawal from term deposits. Most do one of the following when you break a term deposit:
Apply a flat fee
Take a portion of your earned interest
Reduce your total return by adjusting the interest rate
For example, even if you’ve earned decent interest over a year, withdrawing six months early might mean losing a significant chunk of that interest plus a fixed penalty. Always ask your bank for an exact breakdown of potential penalties before making any decision, this removes guesswork from your planning.
Comparing Term Deposits to Other Savings Options
Term deposits are secure but less flexible. First-time home buyers in Australia may benefit from comparing them with other savings options based on access and purpose.
Term Deposits
Higher fixed interest rate
Limited access, with penalties for early withdrawal
Best for buyers with a clear and fixed purchase timeline
High-Interest Savings Accounts
Variable interest rates
Easy access to funds
Best for buyers who need flexibility
Offset Accounts
Reduces home loan interest rather than earning interest
Full access to funds
Best for borrowers wanting to lower interest costs
First Home Super Saver Scheme (FHSS)
Uses tax-effective super contributions
Access subject to conditions
Best for saving specifically for a first home deposit
Here’s why this comparison matters:
A high‑interest savings account or offset account lets you access your cash with no penalties when you find the right home.
The FHSS (First Home Super Saver) lets you save inside your super fund and potentially access up to $50,000 (plus associated earnings) for your first home deposit.
These other strategies may earn less interest than a term deposit, but they give you more flexibility and can help you act quickly when conditions in the property market change.
Government Schemes to Boost Your Savings
Australia offers several schemes designed to help first‑time buyers get into the market sooner:
5% First Home Deposit Scheme
Under this scheme, eligible first home buyers can secure a property with a minimum 5% deposit without paying Lenders Mortgage Insurance (LMI). Government support comes in the form of a guarantee, not a cash payment, which reduces upfront costs and helps with loan approval.
Key points include:
No income caps in the expanded version of the scheme
Works for homes within location‑specific price caps
Helps many buyers enter the market earlier with less upfront savings
This scheme makes it possible to buy a home sooner, but it doesn’t reduce your overall repayments, and you still need to manage mortgage costs wisely.
First Home Super Saver Scheme (FHSS)
The FHSS allows you to make voluntary contributions to your super to save for a home. These contributions benefit from the lower tax rate of super, making it potentially more tax‑efficient than saving in a regular account.
You can contribute:
Up to $15,000 per financial year
A total of up to $50,000
You can then apply to withdraw eligible contributions plus associated earnings to use towards your first home purchase.
Home Purchase Funding: Down Payment and Budget Planning
In Australia, the amount you need for a deposit depends largely on:
The price of the property you’re targeting
Whether you qualify for government schemes
Your own savings capacity
A traditional 20% deposit avoids LMI, but many first‑time buyers now look at lower deposits using government support. The average first home buyer saving a 20% deposit might need over $130,000, a big hurdle in many cities.
Budgeting tips:
Track income and essential expenses to maximise your savings rate.
Set up a dedicated savings or offset account.
Keep an eye on additional costs like stamp duty, legal fees, and moving costs, these add up quickly.
In some states, first home buyers may be eligible for stamp duty concessions or exemptions, which can save tens of thousands.
Exploring Home Loan Options and Key Considerations
Before breaking a term deposit, it is worth reviewing different home loan options and how they may affect repayments over time.
Fixed-Rate Home Loans
Offer predictable repayments
Less flexibility if interest rates fall
Variable-Rate Home Loans
Can benefit from rate reductions
Repayments may increase if rates rise
First Home Buyer Loan Options
May allow lower deposit requirements
Eligibility criteria and conditions apply
Offset Accounts
Reduce the interest charged on your loan
Some accounts may attract additional fees
Interest rates have a direct impact on repayments, and even small changes can affect the total cost of a loan over time. Your credit score is also important, as stronger credit profiles may access more competitive loan options.
Conclusion
Breaking a term deposit to buy your first home is a financial decision that deserves careful thought. Weigh early withdrawal penalties against the benefits of entering the property market sooner, and consider alternative strategies like high‑interest savings accounts, offset accounts, or government schemes such as the 5% Deposit Scheme and FHSS.
Your best choice depends on your personal situation, including savings, timelines, and current market conditions. By planning carefully and understanding your options, you can make a decision that supports both your short‑term goals and long‑term financial well-being.
If you are a first time home buyer, White Picket Mortgages can help you make the best decision for your circumstances.
