8 TIPS: HOW TO SAVE FOR A HOUSE DEPOSIT
With Australian house prices rising significantly in recent years, saving for a house deposit is quite a challenge. We hope these tips will help you.
Jan 2022 – 7 minute read
Key ways to save for a house deposit:
- Decide how much deposit you’ll need
- Establish a savings plan and timeframe
- Work out where savings can be made
- Keep yourself motivated
- Get all the help you can
So, you’re planning to buy a new home or investment property? As one of the biggest purchases you’re ever likely to make, it can be equal parts exciting and terrifying. But before you get distracted by either feeling, let’s focus on the practicalities of saving for a deposit – which is your first step up the property ladder. Here are eight things to consider.
1. Work out how much you need for a house deposit
Choosing the right amount to save for a home deposit is much the same as choosing the size of your home loan. It should be realistic, achievable and within your means.
20% of the purchase price is a good starting point, as this avoids you having to pay Lenders Mortgage Insurance (LMI) – which is a premium added to your home loan when you’re approved to borrow funds with less than a 20% deposit. LMI protects your lender from losses if you’re unable to make the home loan repayments on your mortgage.20% of the purchase price is a good starting point, as this avoids you having to pay Lenders Mortgage Insurance (LMI) – which is a premium added to your home loan when you’re approved to borrow funds with less than a 20% deposit. LMI protects your lender from losses if you’re unable to make the home loan repayments on your mortgage.
Now, work out how much you can afford for repayments each month (your ‘borrowing power’) – adding in an allowance for interest rates going up – to get an idea of how much you can borrow in total against the property price. Our mortgage affordability calculator tool may help.
Then take away the costs of buying a home, such as stamp duty (based roughly on the property value you’re considering), legal fees and moving costs. The figure you’re left with is the amount of your loan that can go towards the purchase. A quarter of that amount gives you the number for a 20% home loan deposit; and adding the two numbers together gives you a budget for your new home.
Or put in basic school maths terms:
- Loan amount – cost of buying = available amount
- Available amount x 0.25 = 20% deposit
- Available amount + 20% deposit = Property budget
To help with your calculations, you can estimate insurance premiums and stamp duty (also referred to as ‘transfer duty’) using our handy stamp duty and LMI calculator. Learn more about all the costs of buying a home on our How to buy a home page.
2. Decide if you’d rather have a smaller house deposit
If you’re happy to pay for Lenders Mortgage Insurance, you may be able to buy a house with a much smaller deposit – as little as 5% of the purchase price – but many home owners prefer to purchase knowing they already have a reasonable stake in their homes. So, they aim for a bigger deposit.
Naturally, the more you pay in deposit the less loan you’ll have to repay, so it’s all about reflecting your financial circumstances – balancing your personal needs now, and your needs in the future.
3. Work out a savings plan and timeframe
Right now, you want to put money aside for a house or apartment deposit. Down the line you’ll be putting money aside for the repayments on your mortgage. So, when is the best time to transition from one to the other?
For many people the answer will be ‘as soon as possible’, so the timeframe for saving for a deposit is going to be dictated by the ‘how much you feel you can save each month’ figure you worked out earlier.
- Deposit ÷ savings per month = savings timeframe in months
Before you lock in your timeframe, add extra ‘hard to save’ months, such as during the holiday season. Conversely, if you know you’ll get a bonus from work at a certain time of year, that could help shorten your timeframe).
4. Create a home for your savings
To make sure you’re keeping your deposit savings apart from your everyday banking or other savings goals, open a separate savings account. Then to ‘automate’ your savings, you could set up an automatic transfer to the account each month, from your everyday bank account.
Shop around for the best interest rate to make sure you’re benefitting from compound interest while your money is tucked away. If you’re aged 18 to 29, a good option could be our Spend’n’Save transaction and savings account package, which offers a competitive interest rate each month you grow your balance and make five eligible debit card purchases.
5. Analyse your current spending habits
Now for the nitty gritty of your savings plan.
Keep a diary of your spending to help identify where your cash is currently going, and where you might be able to make savings, or even the odd sacrifice. You can simply write all your purchases down in a notebook; or download a payment tracker app to your mobile.
The mere fact that you’re having to note everything down can reduce your appetite to spend. Other ways to curb your spending include:
- Ask yourself if you’d rather own a home than have your meals delivered to your current one.
- Think about the cost of fuel versus taking public transport.
- Look at ways to reduce your food bills, such as buying and cooking in bulk, rather than relying on daily convenience purchases.
- Apply the 30-day rule to all major purchases. If you’re not still desperate for it after 30 days, don’t buy it.
- Never go online shopping after a big night out!
That’s just a few ways to start saving. You’ll find more in our how to save money article.
6. Review all your plans
New payment plans are being released all the time. If you’ve been on one for a while, you might be surprised by how much you could save and add to your deposit savings by using new suppliers.
Everyday services that are constantly trimming prices to remain competitive, include:
- Streaming services
Put a note in your diary every couple of months to shop around for what’s currently the best deal in each sector (including ‘introductory offers’). Then switch suppliers if you’ve found better value for money.
Your car, home and health insurance are well worth reviewing too, as there’ll always be someone fighting for your business using a discount as their weapon.
7. Give yourself some visual motivation
Find a picture of your dream home, and put a copy on your fridge, desk or mobile wallpaper. Constantly reminding yourself of the reward for your thrift and sacrifices might just reduce the chances of you pulling a bottle of wine from the fridge mid-week; or succumbing to the temptation of an impulse buy.
And remember that saving doesn’t have to be hard work or demoralising. Find a friend who’s also saving for something and share frugal nights out, home-cooked meals, and the whole savings journey.
Tempted to eat out? Maybe stock up with goodies at the supermarket instead, and head to a scenic spot for a picnic – saving heaps.
8. Check out all the help available for house deposits and expenses
Governments want to help Australians buy their own homes. Here are some of the ways they’re helping:
Government loan deposit and home guarantee schemes
The Australian Government has set up a number of home loan deposit scheme initiatives and guarantees to help home buyers buy sooner, including with lower deposits. The opportunities available tend to be for specific periods, so to access the latest information, visit the National Housing Finance and Investment Corporation website.
First home super saver scheme
This government scheme allows eligible first home buyers to save for a house deposit through their superannuation. Voluntary pre- and post-tax contributions can be made into super funds, with the funds released when required for a home deposit.
Read about eligibility and conditions of use on the Australian Tax Office’s First home super saver scheme web page.
First Home Owner Grant
If you’re a first-time buyer, you may be eligible for a one-off grant to assist with your purchase and/or new build. The nature of the grant varies by state and territory and may involve supporting the payment of stamp duty or providing a lump sum to go towards building or renovating a property.
Learn what’s available where you live by visiting the government’s First Home Owner Grant portal.
We hope these tips and ideas have been useful. You’ll find more information about buying a home, including helpful articles and handy calculators, on our Home loans page.
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