When you take a home loan, the standard rule is that you can borrow up to 80% of the property’s purchase price with no Lenders Mortgage Insurance (LMI) and the rest of the 20% you need to contribute from your own pocket as a deposit. With some lenders, however, you can borrow up to a 95% Loan-to-Value Ratio (LVR), pay an LMI fee and contribute a minimum deposit of just 5%.
Also, most lenders require that you pay at least 5% of the purchase price of the home as a deposit from genuine savings. On top of that, related purchasing costs usually total about 5% of the cost of the home and you’ll need to pay those up front. The bottom line: most borrowers will need to successfully save some money before they’ll be able to get approval for a home loan and buy a property.
How To Fast-Track Your Savings Plan
To save money effectively, budgeting is essential. Budgeting allows you to work out where you are spending your income and manage your money well so that you’ll have enough to put some into savings consistently. This will help you save for a home deposit much more quickly.
Things To Know Before You Budget
One of the first things you need to do before budgeting to save for a home deposit is work out what you can afford.
You will need to take into consideration some of the following:
- Compare property prices in the area where you want to buy: Check out auctions and posted real-estate prices.
- Calculate your Loan-To-Value Ratio; if it’s higher than 80%, then your deposit is less than 20% of the purchase price, and you will probably have to pay LMI.
- Estimate the mortgage repayments you would need to pay once you have acquired the property.
Knowing the requirements and expenses involved when buying a home loan can save you a lot of time and effort.
Should I Track My Spending Habits?
It is a good idea to know your income and expenses before starting a budget.
When tracking your spending, first record everything you spend for one month. This will give you a great idea on how much you spend day-to-day and where you spend it. Take into account all your monthly bills, rent and repayments and items that you may not purchase regularly.
You should also assess your yearly expenses. These can include larger bills, car insurance, and other irregular charges that may not be covered in your month-long tracking.
There are many good mobile phone apps that can help you track income and expenses. Look around and find one that works for you.
How Can I Reduce My Expenses?
Expenses are taken into consideration when calculating your borrowing power. By limiting your expenses, you can improve on how much you can borrow for a home.
So, once you have finished tracking your monthly expenses, it’s time to see where you can cut them down some. Review items such as utilities and car insurance to determine if you can get a better deal on them. The money you save this way can be put towards your deposit.
Another way to save is to move back into your family home. Rent is usually one of the biggest expenses so this can reduce your total spending by a wide margin this way.
Note that if you are renting, some lenders will assume that the rent money will go towards home loan repayments in the future and consider that the same as genuine savings.
How Can I Reduce Credit-Card Spending?
The first step here is to pay off your credit-card debt and other small debts.
Not only will you have less to worry about, but also you’ll pay less in high-interest bills associated with these debts.
You should also reduce the number of credit cards you use.
By closing a credit card, you get rid of the temptation to use it, and may also improve the strength of your loan application, as some lenders will take these cards into account when they calculate how much you can borrow, regardless of whether they are being used or not.
How Do I Write A Savings Plan?
Once you have an in-depth record of your spending habits, you can set up a savings plan.
Write down all the essentials such as rent, bills and food and subtract those costs from your income after tax. The amount left is what you could potentially put towards saving for a deposit.
Beware, though – saving is like dieting. If you are too strict with your money and deny yourself some of life’s little pleasures, it is easy to fall off the wagon.
Be realistic about your lifestyle and what you are willing to give up. Plan out a monthly budget, and take into account small pleasures.
How Can I Adjust My Lifestyle?
Follow these tips for a more budget friendly lifestyle:
- Cook at home instead of eating out.
- Downsize your coffee to regular instead of large (this can save you a dollar a day).
- Find free activities – you don’t have to be a hermit and never leave the house whilst saving. Find entertainment that is free.
- See movies on cheap Tuesday.
- Limit the amount of drinks when you go out.
- Work harder and put extra earnings straight towards savings. As an extra benefit, you will also spend more time working and have less time to spend money.
- Correct bad spending habits by identifying guilty pleasures and restricting them. Don’t get rid of them fully, just learn to control them.
- Avoid materialism and be thankful for what you have. Do you really need those new shoes? Do you really need that new TV?
Consider that all the little things add up. Saving a dollar here or there every day could result in you saving thousands over the year.
How Can A Budget Deadline Help?
One of the key things when saving for a home loan is to set a clear deadline.
This has a number of benefits:
- It will let you know whether you are on track or not – set a due date and create milestones.
- It helps when things get tough, since it is nice to know there is a finish line and sacrifices are not forever.
Be sure to review how you are tracking with your milestones.
Will Opening A High-Interest Savings Account Help?
Consolidating your savings into a high-interest account will make it easier to stick to your budget and save money.
It can help in the following ways:
- Makes it hard to spend your savings. Keeping your savings separate will make it less convenient to withdraw money as well.
- Gives you a clear indication of how much you have saved.
- Helps you focus when you can see all the money saved in one place.
- Your money will work for you, since you earn interest on the money you have saved.
Should I Break down My Budget?
Breaking sacrifices into chunks can also be a great way to keep you to your budget. Whilst you might be saving for two years, that doesn’t mean you have to go without small luxuries for that time.
You can break things down into manageable time frames. For example, for one week you may restrict yourself to only one regular coffee a day instead of two large coffees. Another week you might decide to have a quiet weekend and not go out, and so on.
What Systems Can I Put In Place To Save Money?
You can set up an automatic savings transfer that deposits money into a savings account on a regular basis without you thinking about it. A great idea is to set it up so money is withdrawn and put into your savings the day after you get paid.
This will also reduce the temptation to go out on a spending spree because you will more than likely not see the money before it is transferred into your savings account.
Regular savings contributions look good to the banks, as they assess your genuine savings when reviewing your deposit.
If you have a partner, one of the most important things to remember when saving is to make sure both partners take on a budget and save as a couple. It is important that you are both committed to saving, and are in communication with each other.
What If I Fail To Stick To A Budget?
There are a number of reason people fail to stick to a budget.
- Laziness:Budgeting is like a diet – it takes some self-discipline and time to learn to stick to it.
- Unforeseen circumstances: Anything can happen – you can get sick, lose your job or worse.
- Wrong strategy:Different strategies work for different people; if one system of budgeting does not work for you, then keep trying a new one until you find one that works for you.
If you do fall off the wagon, just pick yourself up, review your budget, and get back to saving. Just remember, saving a little is better than saving nothing. Don’t be too tough on yourself, but stick to it all the same.
What Are Some Other Money-Saving Tips?
Here are some other things that will help when saving:
- Increase your income: If you want to save more money, then why not earn more money? Put in some extra hours, look for a higher-paying job or ask for that raise that is well overdue.
- Plan for the unexpected:Set up an emergency fund in which you can deposit money for unexpected events. These can include unexpected medical bills, car repairs or loss of employment.
- Sell what you don’t need:Gather all the things in your house that you don’t use and sell them. The money earned can be put towards deposit savings.
Should I Apply For Income Insurance?
Once people have a home loan, one question they ask is how they will make repayments if they get injured or sick and can’t work. Most people have 10 days of sick leave a year, but sometimes it is not enough.
Therefore, you should use this opportunity to review income protection insurance. Allocating money for an income protection policy, which will pay 75% of your income up to age 65, is important.
It is as important as taking out home insurance to protect against fire.
With this type of insurance, you don’t have to worry about accidentally missing a repayment due to illness or accident. The great thing is that income protection insurance is tax deductible.
Borrow Without Making A Deposit
What if you haven’t saved a deposit but you want to buy a home now? There are two options for you to borrow without contributing any deposit:
- Borrow up to 105% of the property with no LMI by applying with a guarantor (your guarantor’s property must be in Australia).
- Borrow up to 100% of the property price using the equity in another property.
Borrowing 100% still means you need to cover the additional purchase expenses of the property on your own.
Get Your Dream Home
Once you have saved enough of a deposit and feel ready to apply for a home loan, feel free to contact us.
At Home Loan Experts, we excel at helping people get their home loan approved. Our mortgage brokers know all the major lenders and their lending policies and can help you find the package best suited to your situation.
Call us today on 1300 889 743 or enquire online to speak to us.