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Saving a deposit for a home

Saving a home loan deposit for your first property can sometimes feel like an overwhelming hurdle. But as with most challenges in life, having a plan for how you're going to get there and then focussing your efforts on that goal, makes it feel more achievable.

Start with how much you need to save. This will depend on the value of the home that you're looking to buy. As a first homeowner, are you merely looking to get into the market with a basic house or unit or do you have grander plans about this being the home of your dreams? This will be different for everyone, depending on their earning capacity, ability to make repayments, family situation, location, and the prevailing housing market.

There are 2 parts to the money you need to save - your contribution to the purchase (also known as the deposit) and the upfront costs.

Deposit amount

It's common for lenders to lend up to 80% of the value of a home. This is known as the Loan to Value Ratio or LVR and can effect both the amount you’re able to borrow and your interest rate. With an LVR of 80% the buyer generally needs to contribute 20%. So, if you're looking to buy a home with a purchase price of $600,000, the lender may be able to lend up to $480,000 and you may need to save a deposit of $120,000. 

The good news is there are some tools available to help you get there or reduce the house deposit amount.

First Home Owner Grant

Each state and territory in Australia has a First Home Owner Grant (FHOG) scheme, though they all differ slightly in terms of the amounts available and eligibility requirements. If you're eligible for your state's grant, it's a simple application, often completed by your lender, which, if approved, is then paid directly to the lender when the settlement of your property goes through. To find more information on your state’s offer, go to firsthome.gov.au and select the relevant state.

There are other less common government schemes available to help first home buyers. You can find more information from the National Home Finance and Investment Corporation.

Parental guarantee

Another way to help reduce the amount you need to save is if your parents are willing to provide a Parental Guarantee (sometimes known as  a Family Pledge) using the equity in their home. So, how does that work?

 

Again, let's say you're looking to buy a home for $600,000 but you have only saved $60,000. As a borrower, this would mean you are applying for a loan of $540,000 against a home with a lending value (LV) of $480,000 (at 80% LVR), and the lender needs another $60,000 security value. This could potentially be provided by way of a Parental Guarantee, if your parents have sufficient equity in their home, and are willing to be a guarantor to top up the security.

This way, parents are able to help their children buy a home without lending or gifting them money. Once the loan balance has reduced to within the lending value provided by the home, then in most cases the guarantee can be released, freeing up your parents’ equity again.

Lenders' Mortgage Insurance

Another tool that may be used to reduce the amount of deposit needed is Lenders' Mortgage Insurance (LMI). When asked to lend more than 80% of the value of a home, the lender takes out insurance to protect itself if you’re not able to repay the loan.

 

LMI may help you buy a home sooner with a smaller deposit or it may allow you to buy a more valuable property than you may otherwise be able to afford. It does come at your cost though. In the example we looked at above, a home worth $600,000 and a 10% contribution of $60,000, the mortgage insurance cost would be almost $20,000. In some instances, you may be able to include this cost in your loan amount but remember that means you'll be paying it off over the term of your loan and paying interest on it too.

Upfront costs

So, there's a couple of ways you can reduce the amount of deposit to save. However, the deposit is not the only thing you need to save for. There are upfront costs that you need to factor in as well.
 

  • Stamp duty (also known as transfer duty). All Australian states and territories charge stamp duty on property transfers and this is often the most significant cost when buying a home. Most of the states and territories also have concessions on stamp duty for first home buyers. For example, in New South Wales, the stamp duty rate for a home worth $600,000 is $9,562 plus $4.50 for every $100 over $319,000. This calculates as:
    $9,562 + (($281,000/100) x $4.50) = $22,207.
    However, if you're eligible for the NSW Government's First Home Buyer Assistance Scheme, and the property you're buying is less than $650,000, then you're eligible for a full exemption of that stamp duty cost.
    Your legal representative or lender will usually be able to help you with this calculation.

  • Fees for changes to the Land Titles register. This is another government fee payable to register the documents to transfer the property into your name. These differ from state to state but can usually be found online from the state's Office of State Revenue website.

  • Conveyancing and legal costs. The activities undertaken by legal practitioners to arrange the transfer of a property from a seller to a buyer is known as conveyancing. When buying a property this involves doing various searches of public records to obtain information about the property to protect your interests as a buyer and to prepare the documentation to transfer ownership. These costs will vary so it may be useful to shop around for this service.
      
  • Building and pest inspections.  To protect themselves from buying a property that has potential building or pest problems, many people will include satisfactory building and pest inspections as a condition of their contract to purchase. The inspectors will charge a fee for their services; however, they could also save you from costly repairs in the long run.
      
  • Finance costs. The costs to set up your home loan may include things like your lender’s application fee, LMI, valuation costs and so on.
      
  • Insurance. It’s a good idea to insure the property as soon as you sign the contract and pay your initial deposit, as from there on you have a financial interest in the property and could be disadvantaged if something happens to it. In the beginning you'll only need building insurance, and you can add contents insurance when you move in.

  • Relocation costs. The costs to move into your new home include everything from transporting your belongings to the new home, to hooking up the electricity/gas, internet etc, any modifications you want to do to the property, and any new furniture you may need in your new home. Check out our moving house checklist for more information.

  • Ongoing costs. While you don’t need to save for these up front, things such as your council rates or body corporate levies will be accounted for in the final settlement amount, so it does pay to be aware of these upfront and factor them into your ongoing budget. When you're considering if you can afford a home, it's also useful to think about the maintenance costs too, particularly if it's an older home or has a pool.

These are the most common costs to account for when buying a new home, though there may be others that apply to your specific situation. Being thorough in your planning and including all your costs in your savings target puts you on track to achieving your home ownership goals.

Now that we have looked at both your contribution to the purchase and the upfront costs, you're possibly feeling rather overwhelmed at the amount you might need to save. Let's look at some tips that might help you get there.

Top tips for saving

1. Get in the mood

Saving becomes much less stressful if you have the mindset that it’s all about having the financial future that you want - owning your own home. Think about it as paying your ‘future self’ first before paying for all the other things in your life right now.
 

2. Assess your lifestyle and spending

Take a look at your lifestyle and ask yourself whether some of the things you're doing now (and spending money on) may be stopping you from achieving that financial future you're aspiring to.  This doesn’t necessarily mean cutting back. It could mean switching or choosing to do things differently. Use a tool like our Spend Snapshot to get a good understanding about where your money is being spent, which then puts you in the position to choose whether that's how you want to continue spending your money. Actively look for ways to reduce your spending, especially unnecessary spending, so you can put that money towards your savings. Use our Cost-cutting Checklist for ideas on where you may be able to make some changes.
 

3. Make a plan for your money

Some people call it budgeting and associate it with not having the things you want. Try switching your thinking so that it becomes the plan to get the things you want. By understanding what money you have coming in and prioritising how you spend it, you're better placed to ensure you meet all commitments, get your bills paid on time, enjoy a chosen lifestyle, and set yourself up for the future.
 

4. Set SMART goals

Achieving your financial goals may be enhanced when you set them using the SMART principle and write them down. SMART goals are:

  • Specific - be very clear about what you want to achieve.
  • Measurable - think about how you will measure whether you've achieved the goal or not.
  • Achievable - don’t set expectations too high. Break a big chunky goal down into smaller more achievable pieces to keep yourself motivated.
  • Relevant - why do you want to achieve this goal? How is it going to help you?
  • Timely - set a realistic timeframe to reach this goal.

Sharing your goals with supportive friends and family can also be helpful. Bring them on board as a cheer-squad to keep you going when things are feeling tough and celebrate with you when you win.
 

5. Keep savings separate and put them to work too

Leaving your savings in your everyday transaction account makes them easily accessible and vulnerable in moments of weakness. Keep them separate to your everyday spending money - this may mean another savings account or one that allows you to allocate money into different virtual buckets. Being able to see your savings grow is a great motivator to keep going. You may also be able to get your savings working for you too by keeping them in an interest-bearing account like a term deposit, especially as they get into the 10s of thousands of dollars.

You might also choose to use the government First Home Super Saver Scheme, however it's advisable to obtain financial advice before you do so as it doesn't suit everyone's financial situation.

Set up an automatic deposit either directly from your pay or from your transaction account into your savings account, that way you don't need to think about it and it all happens behind the scenes.
 

6. Celebrate milestones. 

Let's face it. Always watching your money and how you spend it can be tough so it's important to keep your eye on the prize and to celebrate milestones along the way. Set yourself some regular targets within your overall goal and when you achieve them treat yourself in a way that helps to remind you of the end goal and how far you've come.

So, there’s the lowdown on saving a deposit for your home – how much deposit to save, what additional costs there may be, and our top tips for saving. Good luck.

 

Written by the Davidson Institute powered by Westpac.

Things you should know

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.