Step by step instructions on how to save for a down payment on a house
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It can take years to save enough money for a house deposit, which is especially difficult to do when property prices in Australia continue to rise. But if you can exercise self-control with your spending, create a spending plan, and investigate the various support options available to you, it is possible that saving for a deposit will be simpler (and less expensive) than it initially appears to be.
How to Save for a House Deposit in 3 Steps
- 1. Determine the amount of your initial deposit. Get a ballpark figure for how much money you need to set aside.
- 2. Get serious about your efforts to save. Create a budget and look for ways to save money.
- 3. Obtain assistance with your initial deposit. Help from the government, assistance for families, and other forms of aid
1. Determine the amount of your initial deposit.
The standard down payment on a home is twenty percent of the purchase price; however, many mortgage lenders will accept a deposit of ten or even five percent in some cases. Under the Family Home Guarantee program, some may even be willing to accept a deposit of just 2%.
Be conscious of the fact that making a smaller deposit will result in having to borrow more money and, as a result, paying more interest over the course of the loan. If getting into the real estate market sooner rather than later allows you to own your home outright in a shorter amount of time, then the cost may be one that is worth bearing.
If your down payment is less than twenty percent of the total cost of the home, you will typically be required to pay lenders mortgage insurance (LMI), which can drive up your expenses by thousands of dollars.
Learn more about LMI (and how to stay away from it!) by reading on.
How much of a deposit is required from you?
The down payment, or the amount that you have saved up, and the loan, or the money that you borrow, are the two components that make up a property purchase. The amount of the down payment that is required of you is determined by the loan that you are eligible for.
You can get a good idea of how much you might be able to afford by first considering how much rent you are currently responsible for paying. Then, use a loan repayment calculator to determine how the monthly payments for your mortgage stack up against your monthly rent.
For example, if you have a mortgage for $480,000 at a 2 5%, the monthly payments on the mortgage come to approximately $1,900. How does this rate compare to the rent that you pay?
If you're fortunate enough to have a 20% deposit that's worth $120,000, you could put that toward the purchase of a home that's worth 0,000 using a mortgage that costs $480,000. On the other hand, here are some potential outcomes for the scenario involving your deposit:
With a down payment of 5%
- The asking price for the home is 0,000.
- Deposit: $30,000 (a 5% deposit)
- The amount of the loan is $570,000.
- Plus an LMI of approximately $23,000 per year
With a down payment of 10%
- The asking price for the home is 0,000.
- Deposit: ,000 (a 10% deposit)
- The amount of the loan is $540,000.
- In addition, LMI costs of about $13,000
With a down payment of 20%
- The asking price for the home is 0,000.
- Deposit: $120,000 (a 20% deposit)
- The amount of the loan is $480.000.
- No LMI payable
On a purchase of 10%, that LMI premium of $13,000 is quite pricey, don't you think? You pay LMI of over $23,000 with a 5% deposit, which is almost the same amount that you've saved up for a deposit already.
These are staggering numbers, don't get me started. On the bright side, you might be able to roll these premiums into your mortgage, which will free you from the burden of coming up with the money all at once.
Even better, if you are purchasing your first home, you may be eligible for the First Home Loan Deposit Scheme (FHLDS), which will allow you to avoid having to pay these LMI premiums.
Check to see if you qualify to save thousands of dollars with the FHLDS.
2. Get serious about your efforts to save.
In addition to your down payment (and possibly LMI), there is one more significant up-front expense to keep an eye out for, and that is stamp duty. Depending on where you live, you may be eligible for a reduction in the amount of stamp duty you pay if this is your first time purchasing a home.
You can enter your information into this stamp duty calculator, or you can read more about the potential savings in our guide that covers stamp duties on a state-by-state basis.
Once you have decided how much you want to put in your first deposit, you need to get serious about saving. Here are some fundamental and important pointers:
- Investigate your spending habits. You can get a detailed breakdown of what you really spend each month by tracking your spending with an app like the Finder app and getting this information.
- Set a budget Create a reasonable budget with the help of your spending breakdown, and analyze your expenses to determine where you can make reductions in your existing spending.
- First and foremost, you should take care of the most pressing financial obligations. Get any debt under control as fast as possible First and foremost, focus on paying off debts with the highest interest rates; a HECS debt is not nearly as pressing as credit card debt.
- Maximise your savings Use a high-interest savings account to put your money to work while you build up your deposit, or consider putting some of your savings into a term deposit to earn a higher rate of return.
Learn everything you need to know about saving money right here.
If you have an asset that you could sell, such as a car that you are willing to give up or some shares, you should seriously consider selling that asset and putting the money toward your deposit instead of keeping it.
3. Obtain assistance with your initial deposit.
Every single dollar matters when you're trying to save up for a down payment on a house when you're in a tight spot financially. It may appear to be an insurmountable obstacle, but if you devise a comprehensive strategy and make the most of the various programs and rebates that are available to you, you may be able to bring the goal of purchasing your own home one step closer to reality.
It's not always necessary to be a first-time buyer of a home, either. There are some states and territories that provide owner occupiers with discounts on stamp duty, which means you'll pay less than an investor or a buyer from another country would. Additionally, in order to qualify for the FHG that was discussed earlier, you do not need to be a first-time home buyer; however, you are required to be a single adult.
The following are some additional ways in which you might be able to get assistance with your deposit:
- Parental guarantor You can avoid paying LMI and save a smaller deposit if your parents own their home (or the majority of it) and they are willing to guarantee part of your deposit. If this is the case, you will need to save less money. Find out more information about guarantor mortgages here.
- Cash gift We are aware that this is not always the case, but if your parents are able and willing to help, please let us know. ) They might give you a cash gift to help increase your initial deposit. There are only a few guidelines that you must be familiar with.
- Inhabit the same house as your parents. Another piece of advice that requires the assistance of family members is to consider moving back in with your parents for a limited time so that you can apply the money you would have spent on rent each month toward the down payment on a house. This strategy could help you reach your savings goals more quickly.
- Grant for first-time homeowners There are cash grants available for first-time buyers of homes in some states. In order to qualify for the program, you will typically need to purchase a brand-new home for less than a specified price. If you are qualified, you can put some of the grant money toward your initial deposit.
- Other forms of government assistance You are able to make additional contributions to your superannuation, pay less tax on those contributions, and then use the money as part of your deposit if you participate in the First Home Super Saver Scheme, which is sponsored by the federal government. Additionally, the First Home Loan Deposit Scheme enables up to 10,000 first-time buyers to purchase homes without having to pay LMI if they save a 10% deposit and qualify for the program.
Watch this video to find out how much you need to put down on a house.
*There is a possibility that borrowers who are not purchasing their first home could qualify for the loans listed in the table above. However, first-time buyers may find these loans helpful due to the fact that many of them have low interest rates or maximum insured LVRs that are higher than 80%, which means that you can get them with a smaller deposit.
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