Three ways to save for a home deposit
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One of the biggest mistakes I see first home buyers make is not saving enough for their deposit, or even purchasing their first home with no deposit. While this has been occurring less in recent years, broadly speaking it's still an issue.
There are a couple of problems that stem from not saving much of a home deposit. Firstly, without developing a disciplined savings habit you'll potentially find it very challenging to meet your ongoing mortgage commitments, as you're simply not used to having to put away this kind of money every month.
Secondly, if you do have less than a 20% deposit, you'll incur what's referred to as Lenders Mortgage Insurance, an additional expense you'll need to cover in order for the bank to approve your loan. Now, many people just cop this expense on the chin, but it's purely wasted money and, combined with the Stamp Duty payable on all property purchases in Australia, these are some huge additional expenses incurred with purchasing the property.
These additional expenses increase your cost base (or purchase price) substantially and just mean that it will take a lot longer for the property to increase in value over and above this cost base. Although your property may not technically be an investment property (you might be buying it to live in) I'm sure we'd all agree that one of the main reasons we buy property is to grow or increase our wealth.
Of course, if you don't have much of a deposit, you'll likely be borrowing money to cover the purchase price, the stamp duty and potentially even the lenders mortgage insurance. This means you're also paying interest in addition to these costs. Yuck!
So how can you avoid all of these unnecessary expenses, it's quite simple really, it'll just mean having a little short-term patience in order to reap the benefits later.
- Establish your purchase / borrowing price
How much you are willing (and able) to spend on monthly mortgage repayments will largely determine the amount you spend on a property. Use an online calculator (like this one from ING Direct) to work out what the repayments will be on different loan amounts. Once you settle on an amount that you are comfortable borrowing, use this formula to calculate the total price you are willing to spend on the property:
Total Price (inc. Stamp Duty and Costs) = Maximum Mortgage Amount x 1.25
This will give you the total cost base, you will need to of course have factored in stamp duty, legal expenses and other costs into the total cost price too.
While you're doing this, remember that interest rates can change so you definitely need some room to move in your monthly mortgage repayments in case they go up.
- Save at least 20%
The best head start you'll ever have is to have saved a 20% deposit on your home. This will mean your loan is lower, you don't need to pay the Lenders Mortgage Insurance and you'll have the added benefit of having established a disciplined savings habit.
- Be prepared to wait
Let's face it, once you get the itch to purchase a property, it's hard to stop yourself from trawling domain.com.au and realestate.com.au, setting up email alerts and looking in the windows of local real estate agents as you wander by. Although it's great to keep abreast of what the market is doing in the area in which you would like to buy, it's important to remain patient and committed to your personal time frame for buying, based on how much you are going to spend and how long it will take you to save 20% of that amount.
The best things in life come when we have set a goal and put in the hard work to get there. Put in the time to get it right, and it'll pay off in the long run.
Build it slowly.
Disclaimer: Please note this article is of a general nature and should be used for informational and educational interest purposes only. Please seek professional advice before making any decisions in relation to your own personal circumstances.
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