Saving for a first home is undoubtedly going to be on the list of many for 2016.
Saving enough for a deposit may seem out of reach, but there a few ways to ensure you’re on track. Photo: Glenn Hunt
Yet, putting away even 5 per cent of a deposit for a median priced home in Australia can be a tall order.
Here are six steps to achieving your goal for next year.
Know what you can afford
Just like any other goal on your resolutions list, the first thing you need is to work out what the goal looks like.
Not only should you be looking at a percentage of the property value, but you also need to consider extra costs, such as pro-rata rates, to ensure you are saving enough. The best way is to work out a dollar-value figure, a tangible goal that is easy to understand.
ME head of home loans Patrick Nolan said rising property prices can continually push the goal posts further away.
‘While 20 per cent is regarded as the ideal deposit, many lenders will let you borrow up to 95 per cent of your home’s value ???????????????????????? so you may only need a deposit of just 5 per cent,’ Mr Nolan said.
To do this, you need to work out how much you need. A broker or lender can explain your borrowing capacity, so when you know what type of home you want, you should have a quick guide.
Don’t forget to consider:
- Land tax (for some investment properties)
- LMI, which stands for Lenders Mortgage Insurance (usually applicable when a deposit is less than 20 per cent of the purchase price)
- Stamp duty
- Cost of inspections
- Solicitor fees
- Minor costs (postage fees, costs of obtaining a bank cheque)
Add all these costs together with your required deposit and you should have a savings figure in mind. Consider any grants that may be applicable that could revise down your required deposit.
‘Legal fees, home and contents insurance, moving costs – it all adds up. The big cash drain is often stamp duty,’ Mr Nolan said.
‘It’s based on the price you pay for your home, and it’s a fair bet you could be looking at duty costing several thousand dollars,’ he said.
Set a savings goal
Now you know what total you need, work out how much you need to put aside regularly to reach this goal.
Firstly, put a time figure on the goal, such as ‘by the end of the year’.
Using your desired savings figure, divide it by how many pay cycles you have in the year. For instance, if you need to save a further $25,000 by 2017 and you are paid once a week, you will need to save $480 a week, or close to $500 out of every pay packet.
At this point, you will want to reality-check your aim. Is it going to be possible to save this amount? If it isn’t, you may need to lengthen the date for when you hope to have this figure saved or look for cheaper ways to enter the market. Understand your budget
You may already be very familiar with how much you save and spend, but all too often household finances go unchecked.
Find out whether your current budget aligns with your savings goal.
To set a realistic budget, you must first know what you are spending. Keep receipts and records of expenses for a few weeks and you will quickly find out where your money goes.
One way to do this is to spreadsheet your weekly expenses so you can see at a glance where your biggest costs are. If you’re more frugal than you think, you may find saving the desired amount far easier. For most, this will be a much-needed reality shock.
If your current budget doesn’t match your savings goal can can make changes.
Reduce your expenses
For most, finding a few extra dollars is going to be about cutting costs. While you want to allow yourself some treats, you will likely need to rein in your spending significantly.
Whether it’s downgrading a phone bill, bringing in another flat mate or cancelling a subscription, these funds could be channelled into your savings and bring you one step closer to your goal.
Some make sacrifices even if they can reach their savings goals without doing so, using the opportunity to get to their goal even quicker.
With your budget in front of you, look for unnecessary spending. Be honest with yourself about what you can cut to save money, such as buying lunch during the week.
You can then look at services you need and consider shopping around for cheaper alternatives, such as low-priced internet or a lower-priced gym membership.
Selling unwanted items
Most people have a few unused knickknacks around their home. Not only are these unnecessary clutter, but they could also be sold on for cold hard cash to beef up your savings account.
You may want to consider a garage sale if you have a lot to get rid of, but you could also use Gumtree, eBay and Facebook buy/swap/sell pages to move larger or more expensive items, such as furniture.
You may have a few unwanted gifts after Christmas, so get ready to put your marketing hat on and get some money for your unneeded junk. Push your savings further
Many first home savers will have some savings. If you have accrued a substantial sum it’s time to consider where you can put it for the best outcome.
The first consideration is a high-interest savings account, usually a go-to for those wanting flexibility with their money but keen to have it accruing funds. Familiarise yourself with the rules around minimum deposits, fees and withdrawals to ensure you are getting the most bang for your buck. This may require shopping around through different savings account providers.
If you currently have $20,000 and plan to deposit $1000 a month for 12 months, you will find that with some accounts you can earn up to $920 over that period. Lower performing accounts may only provide half that figure, with rates from 2.5 per cent up to 3.55 per cent available.
You could also consider investing your money in shares, bonds or another form of lower-priced investment. However, there is a risk involved and there limited investment options for small sums.
Seek financial advice to mitigate your risk ahead of time.
Another common way for savers to get the most out of parked money is through a term deposit account. Term deposits are similar to high-interest savings accounts, but can be useful for those tempted to access their savings, because the funds cannot usually be accessed without a penalty. For those intending to keep money in one place over the long-term, some good returns are available.
Often, though not always, term deposits can offer a higher interest rate and you can choose the duration.
During the savings process, it’s also worth considering other ways to get into the market in case your savings fall short.
You could consider:
First home buyers who have not accrued a big enough deposit may be able to ask a parent to stand ‘guarantor’. Effectively, the bank’s security is the parent’s existing home’s equity.
If you can’t afford to buy alone, you may want to team up with a partner, sibling or friend to buy a property. Bear in mind there are difficulties with being a co-owner and you should discuss the implications of being financially tied to someone else. Make sure everyone is aware of their responsibilities.
For those parents not willing to stand guarantor but still keen to be involved in the purchase, a ParentAssist loan allows parents to provide their child with up to 20 per cent of the purchase price. These funds are then repaid at a lower interest rate to the parent, while the home buyer also pays back the mortgage on the rest of the funds.
This new product allows relatives to co-invest in a first home buyer’s purchase, allowing them to increase the deposit and minimise fees for those borrowing more than 80 per cent. Effectively, family members become investors in the property before the first home buyer pays out MoveUp2 after three years.