Building your savings
Buying a house is exciting and life-changing; saving the deposit is a little less fun. But the more money you put down upfront, the less you’ll have to borrow.
Here are some tips to help you save your deposit faster, so you can move into your own home sooner.
How much do you need to save for a home?
Work out what you can afford
Be realistic. You may need to consider a smaller property, an older property, or a property in a different area, just to get you started in the property market.
Work out how much you can afford to borrow.
Here is an example of what your calculations might look like once you work out how much you can afford to borrow:
Amount you can afford to borrow + deposit saved – fees & charges* = Amount you can spend on a property
To work out how much you need for a deposit, your calculation might look like this:
Amount you need to buy the property + fees & charges* – amount you can afford to borrow = Deposit you need to save
* Fees & charges could include stamp duty, legal fees, loan establishment fees and lender’s mortgage insurance.
Check out property prices
The property market is always changing. To get an idea of property prices in the area you want to buy:
- Have a look at online real estate websites
- Go to auctions
- Read the property section in your local newspaper.
Check your loan to value ratio
When thinking about how much to save, check your loan to value ratio (LVR). This is calculated by dividing the amount of your home loan by the purchase price (or appraised value) of the property.
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 the lender will not be repaid if you default on the loan and they have to sell the property. Having a high LVR may also affect your ability to refinance your loan later on, and you may have to pay mortgage insurance again if the LVR on the new loan is high.
Usually lender’s mortgage insurance (LMI) is payable if your LVR is above 80%. This is a one-off insurance premium to protect the lender should you default on your home loan.
Some lenders also use your LVR to work out the interest rate on your home loan. For example, if your LVR is more than 80%, you could be charged a higher interest rate than a borrower with a lower LVR. This could make a big difference to your repayments, so it is important to save as much as you can towards a deposit to reduce the size of your loan and try to get your LVR under 80%.
Case study: Jade works out her loan to value ratio
Jade wants to buy a one-bedroom apartment. She estimated this will cost $500,000 in her preferred area. After doing a budget, she calculates she could afford to take out a $450,000 mortgage, so would need to save a deposit of $50,000 plus purchase costs.
She checked her loan to value ratio:
$450,000 loan ÷ $500,000 property value = 90% LVR
With an LVR above 80%, Jade realises that she will be charged lender’s mortgage insurance (LMI) by her lender, so she added this to the estimated costs she needs to save for.
Fast ways to build your home deposit
Develop a plan to help you save your deposit. Work out how long it will take you to save the amount you need, and how much you’ll have to put aside each pay.
Set, plan, track and manage your savings goals.
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. What is left over is what you could potentially save for your deposit.
Give yourself some leeway – if your budget is too tight, it will be harder to reach your target. So don’t cut out all your fun expenses. It’s a good idea to set smaller savings goals along the way and reward yourself with low-cost things you enjoy when you achieve them.
Visit our webpage for some ideas on simple ways to save money.
Move back 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 cut this right down, you could increase your savings very quickly.
Get a high interest savings account
Once you know 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 by transferring your savings to a high-interest savings account.
If you find a savings account that offers bonus interest for every month you don’t make a withdrawal, you’ll be less likely to touch the money unless it’s an emergency.
Automate your savings
Boost the balance in your savings account by transferring money to it as soon as you get paid. You can set up automatic transfers to your savings account online, or you can also ask your payroll department to send part of your pay to your savings account.
Automatic transfers allow you to ‘set and forget’, knowing that your savings are growing without you having to transfer them manually every time you get paid.
Have you thought about investing your savings in shares or a managed fund? This is a good idea only if you plan to buy your home in a few years time because these investments are suited to long-term goals. For more information see investing.
First home super saver scheme
The first home super saver (FHSS) scheme allows first home buyers to save a home deposit within their super fund.
Under the scheme, you can make voluntary super contributions within existing contribution caps. Up to $15,000 of those voluntary contributions made in a financial year can be withdrawn to purchase your first home. The maximum that can be released is $30,000 in total, plus an amount that represents deemed earnings.
Non-concessional contributions can be withdrawn tax free. Concessional contributions and total earnings will be taxed at marginal tax rates with a tax offset of 30%.
More information is available on the Australian Taxation Office’s website.
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.