Homeownership is a dream for many Australians.
If you’re feeling overwhelmed buying a home for the first home, then you can read through our comprehensive First Home Buyers Guide.
The toughest part of realizing the dream of homeownership is saving for a house deposit.
With soaring property prices and stagnant wages, it might seem next to impossible.
Fortunately, there are many simple, yet effective strategies you can adopt today to start for your first home.
How to save for a first home?
Before you start saving, you have to know where you plan to buy your first home – as this will dictate how much you’ll require as a deposit.
For instance, the median price of dwelling values in Brisbane, as of 31 January 2020 is $499,691. You’ll need to save a minimum deposit of at least $24,985 (which is the minimum 5% deposit required).
Typically, between 5% to 10% of the purchase price is needed as the deposit and to cover some of the costs of buying a home.
Once you get an idea of the value of the property, here are some tips for saving for a house deposit.
Step 1: Know where you are spending
Make a comprehensive list of where you are spending your money, and take note of any unnecessary expenses that you can cut out.
Try to save the receipts of the items you’re spending on and note it down on an excel sheet or just write it down on paper.
You can practically save money if you do away with small and unnecessary expenses. Go through your bank statements and look for things that you can cancel or that are costing you a lot of money.
Here are some tips you can follow to cut down on expenses:
- It might be a good time for you to close your gym membership, especially if you don’t go to one regularly. Gym fees average around $25 a week, and this saves you $1300 each year.
- If you’ve got a car, you might want to downgrade it or sell it off, as you have to pay for its insurance, registration, maintenance, petrol, etc. Using public transport or simply walk if your commute is short enough.
- You might be spending close to $300 on food alone, and the lion share of it is for eating out! This includes alcohol and takeaway meals too. Maybe consider bringing lunch from home or have a simple home-cooked meal.
- It’s good to find cheaper alternatives to expensive activities like eating out. Instead of going for dinner with friends, why not go for a potluck dinner or picnic.
- Plan your meals ahead and don’t go grocery shopping on an empty stomach.
- Don’t keep ordering that barista-brewed coffee. Cutting down on coffee alone should save you up to $1000 each year.
- Curb your impulse purchases by adopting the 7-day rule. If you see something you like, note it down, don’t buy it yet! Rethink the item 7 days later, and you might realise you didn’t even need the item in the first place.
- Don’t keep relying on buy now pay later services like ZipPay and Afterpay, as you would be tempted to make more spontaneous and expensive purchases, which might rack up a hefty bill and late fees.
- Instead of buying a new outfit, why not borrow them from friends and family? You are most likely to buy your new outfit only once anyway.
- Search for coupons and discounts online when you’re shopping, and use them.
Golden Tip: When applying for a home loan, lenders assess the most recent past three months living expenses in their assessment. Therefore, you should evaluate your expenses a few months before applying for a home loan. Rectify your spending habits and save money.
Step 2: Stop renting
Rent is one of the biggest expenses you are incurring right now.
The median house rent in Sydney can go up to $530 per week!
And it’s not just the rent you’re paying – you also need to pay for gas bills, energy bills, phone bills, etc., which makes saving for a house a herculean task.
Instead of renting, why not move back to your family home, or co-share with other friends, or you can even house sit.
In 3 years time, you will have saved a sizeable deposit of $82,860.
Step 3: Earn extra money
More than two million Australians are already working two jobs, and one in four have a side hustle to put some extra money in their pockets.
If you cannot get rid of your car, put it to work through rideshare services like Uber, and you could earn more than $10,000 a year!
Think about the skills you have and how you can monetise them.
Pick up odd jobs on Airtasker and Fiverr and if your crafty, why not set up an Esty? You could earn up to $240 just for moving furniture on Airtasker!
Earning a little bit of extra money never goes astray.
Step 4: Create a dedicated savings account
Keep the savings account different from your salary account. Create an automatic transfer from your salary account into your savings account.
Don’t just create an account – look for one that offers a high-interest rate and only use the saved funds when you need it for a deposit.
It’s best not to lump your emergency funds into the same account as you might unknowingly dip into the funds.
Make sure to set up online access so you can keep track of the balance you’ve saved.
Furthermore, if you’re saving up for a deposit together if your partner, you might want to get a joint account.
Step 5: Manage your debts
Try to manage and minimise your debts so you can put the money into the savings for your home deposit.
If you have any existing loans like car loans, personal loans, etc. try to pay them off quicker (make sure to check if there are any early repayment fees).
If you have a credit card that you’re not using, it’s best to cancel it.
Adopting good credit behaviour will get you into the habit of saving for your home loan repayments.
Set a realistic budget
After you’ve taken care of where you’re spending money, put your income into a high-interest savings account and found ways to earn that little extra, it’s time to set a realistic budget.
Be serious about saving, and don’t just try to save whatever is leftover. Set a target of how much you can save each month and try to reach the goal.
Try to start with smaller amounts, and build the amount of deposit as you create a saving habit and adopt a “think before you spend” mindset.
Why should I save a large deposit for a first home?
As a first home buyer, you can get many advantages by saving for a larger deposit for your first home:
- You significantly reduce the Lenders Mortgage Insurance you’ll need to pay. If you save a deposit of 20%, then you don’t even have to pay LMI fee.
- You will be able to get a broader choice of lenders who will offer competitive interest rates. You might be able to negotiate lower interest rates.
- Saving a larger deposit shows that you are a responsible borrower with a strong savings history. You are determined and disciplined to save a deposit to get approved for a home loan.
- A bigger deposit means that you borrow less, which leads to lower monthly repayments on your home loan.
There are low deposit home loan options available if you can’t save up that 20% deposit.
Should I buy now and pay LMI?
When it comes to buying your first home, the biggest mistake you could make might be in delaying your purchase decision.
With soaring property prices, the deposit you have saved might not even reach the minimum 5% requirement if you keep delaying.
Therefore, it might be better for you to get into the market sooner by paying Lenders Mortgage Insurance (LMI).
Even if the LMI costs you over $10,000, the fee is added to your mortgage, and you pay for both the loan and LMI.
You can use our Buy Now or Save More calculator to find out how much you’d save if you choose to buy your first home sooner.
The biggest benefit is that it helps you get into the property market sooner and you fulfil your dream of home ownership.
Frequently asked questions
How much do I need to save for a home deposit?
The amount of deposit you will need to save depends on where and what type of property you are buying and whether you want to pay Lenders Mortgage Insurance (LMI).
While it is practical to save at least 20% deposit to avoid paying LMI, you might need to save a little extra for the additional expenses needed to buy a home.
You might find a property valued at $500,000 but the true cost will actually be more.
You’ll still have to pay $1800 in conveyancing and legal fees, $600 for building and pest inspection, $187 mortgage registration fee, $500 loan application fee, $8000 in mortgage insurance, $500 for council and utility rates, etc.
When do I pay the deposit?
If you’ve bought a property at auction, then you will pay the deposit upfront i.e. when you’ve won the auction.
If you’ve bought a property through a private sale, then the deposit is paid when you exchange the contracts.
What can I use as a deposit?
Most lenders like to see that a borrower has been making deposits into a savings account for at least 3 months as this shows your ability to save and manage your money.
Besides genuine savings, these other funds are also accepted as deposit:
Can I use equity as a house deposit?
Equity is the difference between the value of your home and the loan amount.
You can use this equity to tap into a bigger deposit for your home as well.
So, if you have an investment property, you can use this equity as a deposit towards your first home.
If you do so, your existing investment property becomes a security for the new home loan.
How long will it take to save for a house deposit?
The time it takes saving for a house deposit will depend on:
- Your income and how much you’re spending.
- Whether you’re renting or not.
- Where you want to buy your first home.
Realise your homeownership dreams sooner
Buying a home is an achievable goal you can accomplish with the right resolve and guidance.
We are committed to helping first home buyers achieve their dreams of home ownership.
Call us at 1300 889 743 or fill in our free assessment form to get in touch with our award-winning brokers who will help you throughout your home buying journey.