How to save a deposit

When buying a house, the most significant hurdle to jump – particularly for first home buyers – is saving the deposit. There are plenty of financial advice blogs out there that provide strategies on how to pinch your pennies. Cutting back on takeaway coffee, selling clothes and books secondhand, getting a part time job, downgrading your car and renting out the spare room are just a few of the frequently mentioned strategies.

But before you even start saving, you need to know exactly what figure you’re aiming to accumulate. And to do that, there are several things you need to factor in.

So if you’re beginning the process of saving a home deposit, here’s what to know.

Aim for 20%

The bigger the deposit you can save, the better. It gives you equity in the home right from the start, and you avoid costs like mortgage lenders insurance (see below). It’s especially important for first home buyers – when you’re competing with cashed-up investors, the bigger the deposit you can muster, the better. A larger deposit can help you secure lower interest rates, too.

To work out the exact figure you’re aiming for, you first need to determine the size of the loan you can afford to borrow. There are many online mortgage calculators to help you figure out what your repayments might be.

When determining how much to save, it’s also useful to work out your Loan to Value Ratio, or LVR. The LVR is the proportion of the loan amount compared to the overall value of the property. It helps lenders assess the level of risk you pose as a borrower; the higher your LVR, the more of a risk you’re determined to be.

Be realistic about the amount you plan to save. Being too strict with your budget, and leaving no room for any fun or luxuries, can backfire. Once you have a figure, give yourself a reasonable timeline to achieve it. Having an end in sight helps keep you motivated – it’s harder to save if you feel like you’ll be making sacrifices forever.

Mortgage Lenders Insurance

In some cases you can get around the 20% deposit by paying Mortgage Lenders Insurance. By paying a few thousand dollars upfront, you may be able to borrow up to 95% of the total purchase price. It can come with quite a few strings attached, so do your research when considering this option. Keep in mind that it also means paying interest on a much larger amount of money, and it will take you longer to pay the loan off in full.

Manage your credit record

It goes without saying that when budgeting, it pays to watch the credit cards. Collectively, Australians owe over $50 billion on the plastic.

Not only does credit card debt dramatically slow down your ability to accumulate a large enough deposit, it affects how much lenders will allow you to borrow – or if they’ll let you borrow at all.

If possible, pay off any debt before applying for a home loan, and get your hands on a copy of your credit file to see what state it’s in, and how you might boost your credit score. If there are mistakes, have them corrected.

Demonstrate genuine savings

Lenders look for evidence of ‘genuine savings’ – that’s regularly putting money aside for at least three months. Sudden windfalls, like annual leave payouts, inheritances, grants or tax refunds aren’t included. Lenders also prefer to see regular employment and steady savings.

The First Home Owner Account

For first home buyers, a First Home Buyer Account is an underutilised savings tool. The government makes a 17% contribution for every dollar you deposit, up to $6000 every financial year, and the interest is taxed at just 15%.

There are stipulations; the money can only be used to buy your first home, which you must actually live in (no investments); and you must deposit at least $1,000 every financial year for four consecutive years before you can use the cash. But it’s an excellent way of boosting your savings. Other savings options to investigate include high interest savings accounts, term deposits, or even investing in shares.

Factor in the other costs

The deposit is your main concern when saving, but it’s not the only thing. The process of buying property, and home ownership itself, comes with all sorts of associated costs. Other things you might have to consider include stamp duty, fees for registering the mortgage, legal costs, building or pest inspections, and moving and cleaning costs. It’s a good idea to factor in an extra few thousand dollars on top of the deposit.

Saving for a home takes time and effort, but the rewards are certainly worth it!