A guide to saving for a home deposit
A lot of the first home buyers we speak to in the branch feel a bit overwhelmed by the prospect of saving for a deposit. Here are some of Toby's pointers he gives his members to help them reach their goal sooner.
1. Remember, 20 is the magic number
First things first. It’s important to know how much you need to aim for. If possible, aim to have a deposit that’s at least 20% of the value of the property you want to buy. Having a 20% deposit means you’ll have a healthy amount of ownership (often called equity) in your home from the start, and you’ll avoid the cost of Lenders’ Mortgage Insurance (this protects the lender and not you).
You may still be able to borrow with a deposit of less than 20%, but it’s a good target to have.
If you can’t quite get there by yourself, you might want to think about whether you could get help from your family. That help could be a cash gift to bring you up to 20%, or you could ask a family member to act as a guarantor for your loan. This means they would use their property to secure your loan and would be responsible for it if you became unable to pay it back.
You should think carefully before taking these steps, though. They’re big commitments and you should get the financial and legal advice you need before proceeding.
2. Follow a savings plan
A savings plan doesn’t need to be complicated. It can be as simple as looking at your income and outgoings, then working out how much you can commit to putting aside weekly, fortnightly or monthly. The challenge is sticking to it! Here are some steps to factor into your plan:
Think about savings accounts that will help you to keep your discipline. For example, you might choose to put some of your savings in an account that rewards you if you deposit a minimum amount regularly and make no withdrawals.
You could combine this with a more flexible savings account that does allow you to make withdrawals so you can still access the money if you need it.
If you have a bit more time on your side, there’s always the option of using a term deposit where your savings are locked away for a set period, usually earning you a higher interest rate.
Make sure to keep an eye out for government savings incentives that may be available, like the First Home Super Saving Scheme.
Don’t forget to leave some extra money aside to treat yourself every once in a while. A home deposit is important, but it shouldn’t mean an end to having fun.
3. Use your credit card to your advantage
If used responsibly, a credit card can be a valuable tool if you’re saving for home deposit. There are two main reasons for this:
Boost your interest: You want to keep as much money as possible in your savings account to maximise the interest you earn. To do this, you could deposit your salary into savings then use your credit card for your day to day expenses and bills (provided your credit card has an interest-free period). You then pay off the credit card before the interest free period ends using the money in your flexible savings account. Discipline is required for this technique as you need to keep on top of the repayment periods so you avoid paying credit card interest.
Demonstrate your financial discipline: When you’re applying for a home loan or pre-approval, lenders will look for evidence that you can manage debt responsibly. Having a healthy credit card record can be a good way of showing this.
4. Beware of ‘buy-now-pay-later’ schemes
Arrangements that let you buy something now and pay it off later in instalments can be tempting if you spot something you like in the shops or online. You might think that paying this way will be better for your savings plan by spreading out the cost, but it can be dangerous:
*These arrangements are an enticement to spend money on things you may not need.
*You still need to pay the full amount back eventually.
*You may have to pay extra fees or charges, even if there’s no interest charged.
*It might not seem like you’re borrowing money, but these arrangements are still considered liabilities and will need to be included on your home loan application.
5. Can you avoid stamp duty?
Reaching your goal for your deposit amount can become a lot easier if you can avoid big expenses associated with buying your home. Stamp duty is a good example. It’s essentially a tax that home buyers need to pay when purchasing a property.
But in some instances, if the home you’re buying is below a certain value, you don’t have to pay stamp duty. This can save you thousands, which could be put towards your deposit instead.
Have a look at the stamp duty rules in your state to see what’s what. Then think about how you could meet the criteria for a stamp duty exemption. It might mean thinking about a more affordable suburb, or a home that’s a bit more modest in size or features (do you really need that walk in wardrobe?).
Be realistic. Your first home probably won’t be your home for life, and making changes to your expectations to avoid stamp duty can make getting the keys to your first home that bit more achievable.
If you need more guidance on how to bring your first home within reach, drop into a Great Southern Bank branch for a chat or connect with a specialist through our online form.
Important information:Please note that this is only intended as a general guide in relation to issues you may want to consider when saving for a home deposit. It is not intended to be an exhaustive list of all relevant issues and does not take into account your personal needs and financial circumstances. You should take into account your own particular circumstances, and obtain independent expert advice where needed, before proceeding. Examples quoted are indicative only for illustrative purposes.