As the cost of buying a home increases, you need to save even more money before you can apply for a home loan. Even a 5% deposit requires you to save thousands of dollars.
This means you need to create a saving strategy to make sure you reach your goal faster. Each technique you use should do one of the following:
- Help you spend less
- Help you save more
Are you struggling to get started? We’ve come up with a few deposit saving techniques that can help you to reach your goal.
Know Your Budget
If you don’t understand what you’re doing with your money right now, you’re going to find it difficult to save for your deposit. Sure, it’s easy to put a few dollars aside every so often, but creating a budget means taking a long, hard look at your finances. More importantly, it requires you to consider the sacrifices you’re willing to make to reach your goal.
Happily, it shouldn’t take too long to work out your budget. The key is to keep things simple and create a saving plan that will help you pay your deposit. Start with the amount that you earn, after tax, each month. That’s your baseline figure.
From there, write down all of your expenses. Everything from the utility and food shopping bills, through to your gym membership and the money you pay to subscription services should go on this list. You also need to include the monthly repayments for any debts you currently have. Try to write down every single expense you incur over the course of a month.
Now comes the hard part. You need to look through your list of expenses and start making cuts. Think about what you really need from that list and choose luxuries that you could do without. The luxuries have to go if you’re going to speed up your saving efforts.
So what counts as a luxury? There are so many things you may not realise you spend money on. For example, your morning paper and the lunch you buy at work could add hundreds of dollars to your yearly spend. Keep what you really need, and get rid of all of the rest. You’ll sometimes find yourself saving hundreds of extra dollars towards your home loan every month.
Choosing Your Bank Accounts
A lot of banks use low interest rates to draw you toward their accounts, but you need to look deeper. The majority of banks charge fees for any accounts you open with them. You may have to pay fees for your transactions and account maintenance, just to have access to your own money. You should open a transaction account if you know you make a lot of monthly transactions. This will help you to avoid excessive fees for using your own money. You can also cut down your transaction fees if you pay your bills using automatic debiting, and if you pay for your shopping using electronic funds transfer at point of sale (EFTPOS). EFTPOS only counts one transaction, rather than the several you may otherwise have had to pay for.
Also, consider the bank’s accessibility. Remember that you may pay a fee when drawing money out of any other bank’s ATM. Choosing a bank that you can’t access could cost you hundreds of dollars a year.
You also need to examine the interest rate. More specifically, you must work out when your bank calculates its interest rate. Ideally, your bank will calculate interest every day, so your savings earn money constantly. Those that calculate their interest monthly tend to do so on your minimum monthly balance, rather than the amount that you actually have in your account.
Finally, avoid stepped accounts, which offer different interest rates depending on how much money you have saved. You’ll often find it’s almost impossible to access the highest rate until you have thousands of dollars saved. Before that point, you’ll usually receive a smaller amount of interest than you would with a regular savings account.
Be Honest About Your Debts
It’s so easy to allow debt to pile up. Credit cards offer a convenient source of cash, and most places accept them as a form of payment. You could find yourself spending thousands of dollars on your card, with each expenditure adding to your debt and piling on more interest.
You need to be honest with yourself about your own debts, and your ability to manage them. Ask yourself whether you really need that credit card in your wallet or purse. What about that personal loan, or the car you’re thinking about buying on finance? You’ll save money much faster if you cut out the unnecessary debts you create for yourself.
But what about the debts you already have? Your aim should be to pay them off as quickly as possible, so you become debt free. A consolidation is an option. Pooling all of your debts so you make a single monthly repayment will help you to manage your debts. However, you may also have to deal with a large interest rate.
Alternatively, you could focus on paying the largest debts first, while making the minimum payments on the smaller ones. As you clear one debt, you move onto the second largest, and so on, until they’re all cleared.
The key is to be honest with yourself about your debts, so you can create a plan to clear them. And remember, every on-time payment improves your credit score, which makes it easier to get a home loan.
Set up a Term Deposit Account
By following those three strategies, you should find that you have a few thousand dollars saved in no time at all. Now, you need to move onto the next step: setting up a term deposit account.
A term deposit account will change the way you save. You put money into the account, usually a few thousand dollars, and leave it there for a set amount of time. This could be anything from a few days, up to several years. For that period, the account will have a fixed interest rate, which means your money constantly earns more money. As a general rule, the longer the term, the higher the interest rate.
Term deposit accounts lock your money away, so you don’t give in to the temptation to spend it. Sure, you can access the money for emergencies. However, you’ll find it much easier to keep the money you’ve saved so far if it’s not in an account that you can access easily using an ATM or debit card.
You won’t use the money in the account, which means you don’t pay any fees for transactions. The majority of banks also don’t charge a fee for maintaining term deposit accounts. You should be able to extend the term upon the conclusion of your current term.
The only thing you need to watch out for are the penalty fees for withdrawing money. But even those can act as a motivator to keep your money where it is, so you build your savings faster. Just make sure you’re still able to maintain yourself financially with the money you don’t place into the term deposit account.
Try House Sitting
Saving the deposit for your home loan becomes much easier if you’re living rent-free. Some lenders will take your rent payments into account when examining your home loan application, but you’ll usually still need to have genuine savings.
This is where house sitting may be an option. House sitting involves making an arrangement with somebody that you will take care of their property while they’re away. Best of all, you don’t have to pay any rent for the privilege. This allows you to save hundreds of dollars per month that you would have spent on rent.
House sitting arrangements vary in length from a few days up to several years. You may have to tend a garden or look after some pets, but the work is usually simple. Depending on the arrangement, you may also have to pay utility bills, council rates, and water rates. Furthermore, you’ll pay a deposit at the beginning of the term, which you will get back once the homeowner returns. However, any property damage that occurs while you’re house sitting will come out of your deposit.
Through house sitting, you can live practically rent-free while going about your daily life. As a result, you can stretch the money you earn further, allowing you to save more money towards your home loan deposit.
Remember the First Home Owners Grant
The First Home Owners Grant (FHOG) may be available to people saving for their first home. This changes from state to state, so it’s good to make sure what you can receive if you’ll eligible.
However, you must remember that the FHOG will not cover the entire deposit on most homes. As such, you shouldn’t slow down your saving activities just because you’re eligible to receive it. Instead, use the grant to bolster your savings, so you’re in a more comfortable financial position when you apply for your home loan.
You must meet the following criteria to access the FHOG:
- You’re over the age of 18
- You’ve never received the FHOG before
- You have never owned any other residential properties
- You’re an Australian citizen
There are some other requirements to keep in mind, so it’s best to speak to an expert to get an understanding of how you can access the grant.
Further to the FHOG, some states offer their own home buying incentives, such as stamp duty concessions. Research the state’s initiatives to see which you’re eligible to receive.
Some Extra Tips
Those are six techniques that you can put into practice to save for your home loan deposit. We’ll end with a few quick tips that will help to push you over the line:
- Don’t delay because you feel like you need to save a certain amount each month. Even the smallest monthly savings earn compound interest and will help you to reach your target.
- Always think twice before making a purchase.
- Avoid taking credit and debit cards with you when you go shopping. This will help you to avoid impulse purchases that could lower the amount you save for the month.
- Try to find an alternative to renting. House sitting or living rent-free with your parents might be an option.
- Develop your savings history by placing money regularly into a savings account held in your name. Lenders use your savings history to work out how reliable you’ll be when repaying your home loan.
- Saving 20% of the home’s value as a deposit will help you avoid Lender’s Mortgage Insurance (LMI), which lenders use to protect themselves from defaults. LMI often adds thousands of dollars to the cost of your home loan.
What to Do Next
Follow this guide and you’ll save the money you need for your home loan deposit faster. Every dollar you save takes you one step closer to your new home. We also recommend that you do the following:
- Work out how big your deposit needs to be.
- Use our calculator to figure out how much you can borrow.
- Live chat with a uno home loan consultant to find a suitable home loan.
This information is general in nature, and you should always seek professional advice when making financial decisions.