Building your savings
Buying a house is exciting and life-changing. What’s not as much fun is saving for the deposit. But the more money you put down upfront, the less you’ll have to borrow.
There are many ways to save for a home that don’t require major changes to your lifestyle. With a good savings plan and some discipline, you’ll soon have the deposit for your home sweet home.
How much do you need to save?
To get an idea of property prices in the area you want to buy, go to auctions or read the property prices in the newspaper. The property market is always changing so it’s important to know how much you should spend on a property in the area you like.
Work out what you can afford
Work out how much you can afford to spend on a deposit and your mortgage repayments. Use the mortgage calculator to figure out how much your monthly repayments will be. Consider buying a cheaper house if it means your repayments will be easier.
Check your loan to value ratio
In thinking about how much to save, it is helpful to check your loan to value ratio (LVR). This is a percentage that is calculated by dividing the amount of your home loan by the purchase price (or appraised value) of the property you want to buy.
Lenders use your LVR to gauge how risky it would be to give you a loan. In general, the higher your LVR, the higher the risk that you could have difficulty paying off the loan because of borrowing a high percentage of the value of your property.
If your LVR is above 80%, the lender will likely charge you lenders mortgage insurance (LMI). This is a one-off insurance premium to protect the lender should you default on your home loan.
Aim to save a deposit of 20% or more of the purchase price of your home to avoid paying lenders mortgage insurance (LMI).
Case Study: Jade works out her loan to value ratio
Jade wanted to buy a one-bedroom apartment. She worked out this would cost $350,000 in her preferred area. After doing a budget, she calculated she could afford to take out a $300,000 mortgage, so would need to save a deposit of $50,000 plus purchase costs.
She checked her loan to value ratio:
$300,000 loan ÷ $350,000 property value = 86% LVR
With an LVR above 80%, Jade realised that she would be charged LMI by her lender, so added this into her estimate of costs.
Save until you’re home sweet home
Develop a plan to help you save towards your deposit. Use the savings plan to write down your goals, when you want to buy your house and how you are going to save. ASIC has developed this Microsoft Word documentwhich you might find helpful.
Cut back on the extras
The easiest way to see where you can cut back is by doing a budget. Write down your essential costs, such as rent, bills and food, and subtract this amount from your income (after tax). What is left over is what you could potentially save for your deposit. Try to spend as little as possible on non-essential items and put away all your spare money for the deposit.
Give yourself some leeway – if your budget is too tight, it is harder to reach your target. So don’t cut out all your non-essential expenses. A good idea is to set smaller savings goals along the way and reward yourself when you achieve them.
Case Study: Penny saves her deposit
Penny set herself the goal of buying her apartment in 4 years time. She looked at her budget and identified several ways to save for her deposit. She opened a high-interest online savings account and arranged for a proportion of her salary to go into it each fortnight. She also reduced her expenses by cancelling her gym membership, cutting back her mobile phone bill and limiting herself to one dinner out a month.
After 4 months she had saved $4,000 so she rewarded herself with a dinner at her favourite restaurant. In 1 year she saved almost $13,000 and after 4 years she had over $56,000 for her deposit.
Moving into the family home
While it may not seem that appealing, many young people choose to move back into the family home while they are saving for their first house. Rent is likely to be one of your biggest expenses, so if you can avoid paying this, you could increase your savings very quickly.
Make the most of what you save
Once you have worked out how much you can save, make your money work for you. If you leave it in your everyday transaction account, you might be tempted to use the cash. You will also earn less interest than you would with other accounts or options:
- Savings accounts: These have a higher interest rate than transaction accounts
- First home saver accounts: These are specifically designed for first home buyers
Investing your savings
Have you thought about investing your savings in shares and term deposits? This is a good idea only if you plan to buy your home in 5 years or more.
Buying a home is a big step and it’s easy to be daunted by the large sums of money involved. With careful budgeting, saving money towards your own home is made much easier.