Building Your Savings
Buying a house is exciting and life-changing; saving the deposit is a little less fun. But the more money you put down upfront, the less you'll have to borrow. Here are some tips to help you save your deposit faster, so you can move into your own home sooner.
1. Work out what you can afford
Be realistic. You may need to consider a smaller property, an older property, or a property in a different area, just to get you started in the property market.
2. Check out property prices
The property market is always changing. To get an idea of property prices in the area you want to buy:
- Have a look at online real estate websites
- Go to auctions
- Read the property section in your local newspaper.
3. Check your loan to value ratio
When thinking about how much to save, check your loan to value ratio (LVR). This is calculated by dividing the amount of your home loan by the purchase price (or appraised value) of the property.
Lenders use your LVR to gauge how risky it would be to give you a loan. In general, the higher your LVR, the higher the risk the lender will not be repaid if you default on the loan and they have to sell the property. Having a high LVR may also affect your ability to refinance your loan later on, and you may have to pay mortgage insurance again if the LVR on the new loan is high.
Usually lender's mortgage insurance (LMI) is payable if your LVR is above 80%. This is a one-off insurance premium to protect the lender should you default on your home loan.
Some lenders also use your LVR to work out the interest rate on your home loan. For example, if your LVR is more than 80%, you could be charged a higher interest rate than a borrower with a lower LVR. This could make a big difference to your repayments, so it is important to save as much as you can towards a deposit to reduce the size of your loan and try to get your LVR under 80%.
Fast Ways to Build Your Home Deposit
1. Set, plan, track and manage your savings goals
Develop a plan to help you save your deposit. Work out how long it will take you to save the amount you need, and how much you'll have to put aside each pay.
2. See where your money is going by tracking your personal expenses on the go & cut back on extras
The easiest way to see where you can cut back is by doing a budget. Write down your essential costs, such as rent, bills and food, and subtract this amount from your income. What is left over is what you could potentially save for your deposit.
Give yourself some leeway - if your budget is too tight, it will be harder to reach your target. So don't cut out all your fun expenses. It's a good idea to set smaller savings goals along the way and reward yourself with low-cost things you enjoy when you achieve them.
3. Move back into the family home
While it may not seem that appealing, many young people choose to move back into the family home while they are saving for their first house. Rent is likely to be one of your biggest expenses, so if you can cut this right down, you could increase your savings very quickly.
4. Get a high interest savings account
Once you know how much you can save, make your money work for you. If you leave it in your everyday transaction account, you might be tempted to use the cash. You will also earn less interest than you would by transferring your savings to a high-interest savings account.
If you find a savings account that offers bonus interest for every month you don't make a withdrawal, you'll be less likely to touch the money unless it's an emergency.
5. Automate your savings
Boost the balance in your savings account by transferring money to it as soon as you get paid. You can set up automatic transfers to your savings account online, or you can also ask your payroll department to send part of your pay to your savings account.
Automatic transfers allow you to 'set and forget', knowing that your savings are growing without you having to transfer them manually every time you get paid.
6. Consider investing
Have you thought about investing your savings in shares or a managed fund? This is a good idea only if you plan to buy your home in a few years time because these investments are suited to long-term goals. For more information see investing.
7. First home super saver scheme
The first home super saver (FHSS) scheme allows first home buyers to save a home deposit within their super fund.
Under the scheme, you'll be able to make voluntary super contributions, within existing contribution caps, and from 1 July 2017 up to $15,000 of those voluntary contributions made in a financial year can be withdrawn to purchase your first home. The maximum that can be released is $30,000 in total, plus an amount that represents deemed earnings.
Withdrawals can be made from 1 July 2018. Non-concessional contributions and earnings can be withdrawn tax free. Concessional contributions and earnings will be taxed at marginal tax rates with a tax offset of 30%.
More information is available on the Australian Taxation Office's website.
Buying a home is a big step and it's easy to be daunted by the large sums of money involved. With careful budgeting, saving money towards your own home is made much easier.
Track Your Spending
You may think that spending on big things is what gets you into trouble with money. But often it is the everyday little things that end up costing you more.
It's good to keep track of where your money goes so you don't live beyond your means. Here are a few things you can do to make sure your spending fits in with your money plan.
1. Match your budget with your bank statement
One way to keep an eye on your spending is to match your budget with your bank statement. Check your bank statements by looking at the money coming into your bank account and the money going out. Use both your transaction account and credit card statements to see if your budget truly reflects your spending.
2. Do a spending diary
Another way to work out where your money is going is with a spending diary. Make a note of everything you spend for one pay or benefit period or at least a week. This will only take a few minutes a day.
Here's what to do:
First, decide how long to track your spending (for example, for a week, a fortnight or a month). Choose a timeframe you know you can stick to. The important thing is to do it every day.
Get a small notebook to use as your spending diary. Take it with you wherever you go. Or, if you have a smartphone, download the ASIC MoneySmart free spending tracker app TrackMySPEND.
Record everything you spend (for example, groceries, bus tickets, magazines, clothes, bills). Do this straight away. Keep receipts if you buy a few things at once.
Don't try to alter your spending habits during the tracking period. Just notice where your money goes.
At the end of the tracking period, add up everything you have spent. Now you have a good snapshot of your day-to-day spending.
3. Check for spending leaks
What would you do if you had $840? Use it for a holiday? Put it in a savings account? Pay off your credit card? Or buy a cup of coffee? That's right, just one $3.50 cup of coffee every morning will cost you $840 over a year.
Spending leaks are those small regular purchases, like a morning cup of coffee, that add up over a period of time. If you're trying to save some extra cash, think about your spending leaks.
Because spending leaks are often the fun things like drinks or entertainment, don't cut them out completely. Instead, choose just one or two things to cut back on. Or think of ways to spend smarter:
Instead of spending $3.95 on a magazine every week, or $205 over the year, take out a subscription, which will cost $148 for the year
Going to the movies once a week costs $20, or about $1000 a year, but hiring a DVD instead can more than halve this cost