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How to save for a deposit

06/03/2020

A handy guide on where to start when saving for your first home.

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Many studies are showing that young Australians aren’t just splurging their monthly income on brunch or the latest smartphone - instead, they’re thinking about owning their first home.

However, as the costs of living keep rising, saving any part of your paycheck - let alone a home deposit - can seem like an impossible task. Luckily, with the right tools and financial know-how, any young Aussie can build up their deposit and eventually become a homeowner. It just requires discipline, creative thinking and a good strategy in place to really give your savings the boost they need.

How much should I save up?

Many lenders accept deposits as low as 5%, however, the general rule of thumb is to try and save a 20% deposit so you can avoid paying costly Lenders Mortgage Insurance (LMI). That’s insurance to protect banks and financial providers in case the borrower stops making repayments and defaults on a loan and could amount to thousands of dollars. When you put down less than 20% in deposit, you’re considered a riskier borrower, and so, you’re charged LMI to give the lender peace of mind.

Property prices vary depending on the suburb you want to live in, so it’s important to do your research on location beforehand by checking how much properties in the area cost on average. That way, you can work out what a 20% deposit would mean for you.

Besides the deposit, you’ll also need to budget for stamp duty, which is a one-off government fee you’re required to pay once you’ve bought your new home. This cost is calculated based on factors like your property value, the city you live in, and the type of loan you’ve taken out.

Tips to save for a home deposit

To kick start your savings journey today, here are five steps to help you grow your funds and make your dream home a reality:

1. Create a budget - and stick to it!

Budgets are a great way to not only save more, but also show lenders that you’re financially responsible. With budgeting, it’s useful to prioritise a savings goal, so that you have a finish line to move towards. For example, you might set a goal to finish saving for your deposit in three years’ time.

That said, it’s no easy job to commit to a budget, so the trick is to make it realistic! You could start with the ‘50/20/30’ strategy, where you put 50% of your income into ‘needs’ (e.g. rent, power bills, transport, debt repayments), 30% into ‘wants’ (e.g. eating out, shopping, entertainment), and 20% into savings.

2. Review your spending habits

Whether it’s one too many meals out or a gym membership you rarely use, taking a step back and assessing your financial situation can bring your spending habits into perspective. By creating a spreadsheet which lists your recurring purchases, or by combing through your bank statements over the past 3 to 6 months to find the biggest culprits sucking your savings dry, you can pinpoint exactly where your money has been going.

From there, divide your expenses into ‘needs’ and ‘wants’, and see which indulgent ones you could reduce or remove. In particular, it’s useful to think about how you could cut down on the bigger expenses. While giving up on takeaway coffee or eating out less is a good start, decisions like moving back home with family can alleviate much heftier costs (like rent) and reap bigger savings. 

3. Clear your debt

It can be hard to focus on long-term saving when you have credit card or personal loan debt hanging over your head. That’s why it’s better to tackle any debt sooner rather than later.

Consider prioritising your debt according to interest rates, starting with the biggest killers (usually credit cards). Or make your life even easier by rolling multiple debts into a debt consolidation loan - that way, you can make just one repayment a month, save on interest and free yourself from debt faster. And once you’re free of debt, the money that was going towards paying interest can start going towards a home deposit.

4. Stash your cash away

This step is all about making sure the savings you already have are working hard for you and earning interest. One low risk place you could park your funds so they can grow is inside a savings account

5. Prioritise genuine savings

Finally, make sure at least a part of your deposit is genuine savings - that’s money you’ve actively saved up. For instance, inheritance money or financial gifts you’ve received from family won’t count as genuine savings, but the money you’ve earned and put inside your savings account or term deposit (for at least three months) would.

Saving up for your deposit is a chance to show a lender evidence of genuine savings, which can greatly help your chances of being approved, because it shows that you’re financially responsible, and capable of prioritising where your money goes.

Schemes for first home buyers

If you’re still struggling to get your foot in the door, the government offers a range of grants and schemes to help out first home buyers: 

  • Working to ramp up your savings strategy? The First Home Super Saver (FHSS) scheme lets you contribute funds for your first home to your super, capped at $30,000 (at which point you may withdraw the money). Every year, you can salary sacrifice up to $15,000, and the great thing is, these funds are taxed at a light 15%. So you end up saving more than what you would by putting cash inside a savings account.
  • Need a financial boost? The First Home Owner Grant is a one-off grant for first home buyers. Each state has its own offering and eligibility, so be sure to check the caps and criteria for your state before applying.
  • Saved up only a 5% deposit? No worries - under the First Home Loan Deposit Scheme, the government guarantees 15% of your deposit, giving you a free pass on paying LMI. But keep in mind that since you have a smaller deposit, rates may apply and only a select number of lenders offer this scheme.

Ready to start saving up for your first home? Armed with these tips and tricks, your dream house could be in your hands sooner than you think!

Katherine O'Chee is a personal finance writer at financial comparison site mozo.com.au.

This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Information in this article is current as at the date of publication. Terms, conditions, fees, charges and credit criteria apply. We do not recommend any third party products or services and we are not liable in relation to them. Any links to third party websites are for your information only and we do not endorse their content.

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