As the property market in Australia reaches unprecedented heights, many aspiring homeowners find themselves disheartened and, at times, overwhelmed by the prospect of accumulating a sizable deposit.
The ever-increasing prices, coupled with the fierce competition, can make even the most determined property buyers question their ability to succeed in this market.
Unfortunately, this daunting scenario leads numerous potential homeowners to give up their dreams, believing that the deposit-saving journey is an impossible challenge.
However, if you approach the task methodically and embrace a step-by-step strategy, saving for a home loan deposit can become an achievable and rewarding experience.
With that, here are 3 tips for saving for a home loan deposit.
Tip 1: Evaluate Your Financial Position and Set Goals
Before embarking on the journey to save for a home loan deposit, you need to have an accurate picture of your financial position so that you can set goals. To do this, follow the following steps.
Assess Current Savings and Expenses
Begin by creating a comprehensive list of your assets and liabilities, which will give you a clear view of your financial situation.
Then, focus on addressing any debt you may have. You need to prioritise repaying high-interest debt, because it’ll improve your credit score and make managing your finances much easier in the future.
After addressing your debt, take a closer look at your monthly expenses to identify areas where you can cut back and save more. Establishing a budget can assist you in allocating your funds more effectively towards your savings goals.
Lastly, consistently monitor your expenses and savings progress. This will help you stay on track and make any necessary adjustments along the way, ensuring that you maintain a steady path towards financial stability.
Determine Affordability of Mortgage
Now that you have a clear picture of your finances, you need to determine your borrowing capacity and the mortgage amount you can afford.
A general rule of thumb is to keep your mortgage repayments at or below 30% of your monthly gross income.
Use a mortgage calculator to estimate your potential repayments depending on the interest rates, loan amount, and loan term.
Additionally, consider the extra costs associated with purchasing a home, such as:
- Stamp duty
- Conveyancing fees
- Inspection costs
- Lender’s mortgage insurance (applicable only if you don’t have a 20% deposit)
With a better understanding of your financial situation and mortgage affordability, it’s time to set realistic saving goals.
Break down your goals into manageable milestones by setting target amounts and deadlines for each step. For example:
- Save 5% deposit in 12 months
- Save for stamp duty and extra costs in 18 months
- Reach 20% deposit in 36 months
Track your progress regularly and celebrate your achievements to help you stay motivated. Adjust your savings targets if your circumstances change, but always keep your end goal of homeownership in mind.
Tip 2: Explore Different Methods for Saving
Now that you have some goals in mind, make sure to utilise the best savings strategies to keep you on track. We recommend starting with the following.
To save effectively for a home loan deposit, you should implement budgeting techniques.
Start by listing your monthly expenses, categorising them into necessities and non-essentials. This helps you track your spending and identify areas where you can cut back.
Set realistic saving goals and allocate specific amounts of your income towards your deposit. Monitor your financial progress regularly and adjust your budget as needed.
Automate Savings Contributions
One way to build your deposit is to automate savings contributions from your paycheck. Setting up automatic transfers to a savings account allows you to consistently save without being tempted to spend.
Use High-Interest Savings Account
Using a high-interest savings account can accelerate your deposit growth. Research banks that offer competitive interest rates and bonus interest for regular deposits. High-yielding accounts will help you earn more interest over time, increasing your savings.
Avoid Unnecessary Debt
As you save for a home loan deposit, you need to avoid accumulating unnecessary debt. Limit your credit card usage and avoid taking out high-interest loans, as these can hinder your saving progress. Meanwhile, prioritise paying off any existing debt, as this will improve your borrowing capacity when applying for a mortgage.
Cutting expenses can significantly contribute to your home deposit savings. Review your daily and monthly expenditures to identify areas where you can reduce or eliminate unnecessary expenses. Consider:
- Reducing eating out and opting for home-cooked meals
- Cancelling unused subscriptions and memberships
- Shopping smarter by comparing prices and buying in bulk.
Boosting your income can help you save for a home loan deposit more quickly. You can look into:
- Taking on freelance work or a part-time job
- Negotiating a salary increase at your current job
- Selling items you no longer use or need through online platforms
Tip 3: Take Advantage of Government Help
If you aren’t able to realistically save a big enough deposit, you can also explore alternative options to get you into the property market sooner. Some options include:
First Home Owner Grant
The First Home Owner Grant (FHOG) is an Australian Government initiative to help eligible first home buyers purchase a property. It provides a one-time, tax-free payment to those who are eligible. Note that the amount and eligibility criteria may vary between states and territories.
Additionally, to find out the specific requirements and grant amounts in your area, you should check your local government’s website.
Note that some states and territories also offer a home loan deposit scheme where the government acts as your guarantee to avoid Lenders’ mortgage Insurance (LMI), while most lenders require you to save 20% of the property value for the home loan deposit. The bigger your deposit, the less risk for them.
If you don’t have that much saved, you might have to pay lenders’ mortgage insurance. LMI protects the lender in case you default on your loan, but unfortunately, it is an extra expense for you as a borrower.
Guarantor Loans To Avoid Lenders’ Mortgage Insurance
Another option that can help you avoid paying lenders’ mortgage insurance is a guarantor loan.
With a guarantor loan, a family member or close friend agrees to take on some of the responsibility for your home loan repayments if you can’t meet them.
In turn, this helps you secure a loan with a lower deposit—usually using your nominated guarantor’s own home as security. Oftentimes, this bypassesthe need for LMI.
Additionally, guarantor loans can be a great way to get on the property ladder while you’re still saving for your deposit, but you should be aware of the risks.
For starters, your guarantor is putting their financial wellbeing on the line, and if you can’t keep up with the repayments, they’re legally responsible for covering the shortfall. It’s essential to have a clear understanding of the commitment required and maintain open communication with your guarantor throughout the process.
Final Advice and Considerations
Be Realistic About the Process
When saving for a house deposit, it’s important to be realistic about the process.
It might take longer than you initially expect, so it’s crucial to stay patient and remain committed to achieving your goal. We recommend breaking down your target deposit amount into smaller, more manageable monthly savings targets, and track your progress over time.
For example, if you aim to buy a property with a purchase price of $725,000 in 3 years, you will need to save $4,030 a month to reach a 20% deposit of $145,000.
Keeping monthly goals in mind will keep you motivated and on track.
Research Your Options
Take the time to research the various options that can help you save for a home loan deposit more efficiently.
Start by exploring different savings accounts. Some banks offer high-yield savings accounts that provide better interest rates than traditional ones, which can expedite your savings growth.
Automatic savings plans are another tool you can utilize. You can contribute to your home deposit fund consistently by setting up automatic transfers to your savings account.
Seek Professional Advice
Lastly, don’t hesitate to seek professional advice. Remember, a financial advisor and mortgage broker can help you navigate the home loan deposit savings process and provide tailored recommendations based on your financial goals and circumstances.
They can also guide you towards more effective strategies and potentially help you secure a better interest rate on your future home loan.
Remember, saving for a home loan deposit is a gradual process, and following these tips can help you successfully work towards your homeownership goal:
- Determine your deposit size
- Create a budget and set realistic goals
- Prioritise debt repayment
- Automate your savings
Utilise helpful tools
- Seek external help.