While it might be the classic dream, owning a comfortable and spacious home doesn’t need to be an unattainable fantasy. Thankfully, there are many ways for first time buyers to join the property ladder – all it takes is a little discipline and an easy-to-implement plan.
Here are some of the best ways to save for a home loan deposit.
Step one: Work out how much you need to save
First things first, you need to know how much money you need to save in order to work out a timeline and formalised plan.
The type of property you want to purchase will play a major part in this final figure, as age, size and location are all factors that increase or decrease property prices.
Your income will also have a significant influence on the type of property you can afford to buy, and from here, it’s important to consider your debt-to-income ratio. This calculation involves adding up all of your monthly debt payments and dividing them by your gross monthly income (before tax and other deductions have been removed). This figure lets lenders see if you have the ability to manage the payments you make each month to repay the money you have borrowed.
As a first home buyer, most banks will lend you 80 per cent of the value of your home, i.e. a loan to value ratio of 80 per cent. Therefore, your deposit will be the other 20 per cent. Anything less than 20 per cent of the property’s total price will incur higher interest rates by your insurer and you may have to pay lender’s mortgage insurance.
Your mortgage lender will perform specific mortgage calculations and cross reference them to your debt to income ratio to help get a clearer idea of your financial circumstances.
From here, you can focus on creating a concrete savings plan with your long term goals in mind.
Step two: Find realistic savings goals that work for you
Everyone is different, and what savings strategies work for some, may not work for others. However, there are many easy-to-adopt plans, including – but not limited to – the following examples:
Cut spending on unnecessary items
While your $4.50 flat white may seem like a daily necessity, small day-to-day amounts soon add up into surprisingly large sums. For example, if you spend $4.50 five days a week and do so for 48 weeks of the year, that’s $1,080 spent on coffee alone! Unfortunately, there are many other external payments being made every day that people don’t always give a second thought to, and often leave people with nothing to show for their spending.
Thankfully, you don’t have to give up everything – there are small swaps you can make that can have a big impact in your savings fund. Instead of buying a coffee every day, restrict yourself to one purchased coffee per week, utilising free coffee appliances at the office on the other days.
At the end of the day, small sacrifices are worth it in the long run when weighing up the prospect of a home over an overpriced flat white.
You don’t have to give up everything – there are small swaps you can make that can have a big impact in your savings fund.
Set-up an automatic payment into a high interest savings account
Instead of waiting until the end of the month to see what money you have left to put into a savings account, do the opposite – set up an automatic payment at the start of each month that goes straight into a high interest savings account. This will leave you with a sum of money that is yours to spend on important things like rent, bills and other expenses.
You can then stretch this figure out over the month, resting easy knowing that the specific amount needed to go towards your saving budget is already looked after. Better yet, it’s also generating a higher amount of interest than it normally would when left in your day-to-day account. Banks such as RaboDirect are currently offering an introductory bonus rate of 3.05 per cent to your balance for the first four months to help give savings a boost.
Consider investing in shares or managed funds
You don’t have to be a stock market big shot to reap the financial rewards of investing – every Tom, Dick and Harry can invest money into assets in the hopes that they will grow in value and return higher income. From stocks to shares, there are several ways to invest money, all of which can be done with the help of a financial advisor. There is a degree of risk associated with investing – however, after careful consideration and professional opinions, the balance between risk and return can easily be managed.
It’s important to note that investing is better suited for those that have long term savings goals in mind, as returns are not always immediate and can take time to appreciate.