Though the story is a well worn one at this point, it seems the only way to get on to the property ladder is to live with our parents (hopefully for free) or live like monks to save a home deposit. If the prospect of moving back in with mum and dad doesn’t appeal to you (and let’s be honest, why would it) there is some good news – you can save for a home while renting.
The downside? You might have to make some sacrifices. Here is a surefire plan for making a go of saving for a home deposit while still renting.
Running the numbers – what price is your dream home?
First, you need to figure out exactly what type of home you’re after. Are you planning a family, which means needing more room down the line; do you want to stay in your neighbourhood; can you afford to move closer to the city; are local amenities important? Once you’ve figured out the area and type of home you’re looking for, you can figure out how much you could afford to pay in monthly loan repayments. This should give you a rough estimate of what’s in your price range.
The golden number – the deposit
If your price range is, for example, around $700,000, you’ll also know what amount you’ll need for a deposit. 20% is the best rule for a home deposit – in this case, $140,000. Some lenders do accept lower deposits of 10% or even 5% – however you will have to pay Lender’s Mortgage Insurance.
“It’s worth seeing a mortgage broker to discuss your home loan options or accountant to figure out your borrowing potential at this stage,” says CEO of Savvy Bill Tsouvalas. “This can impact how much you’ll need to save for a deposit, so it’s worth finding out all the facts up front.”
Sorting your finances
At this stage, you should figure out your credit score – the higher the score, the lower risk you are in the eyes of lenders. If you have debts on credit cards or personal loans, you may be able to consolidate them and pay less in interest.
You should look at your bills and expenses and see what you need to trim in order to make enough savings. These could be:
- Switching to cheaper utilities or telco plans
- Getting rid of luxuries – why pay for a gym membership you never use?
- Taking public transport instead of using cars; or even sell a car you don’t use often
- Try to minimise rent by taking on a roommate, or moving out to a cheaper location
- Use energy more efficiently – take advantage of LED lights
Other tips and tricks
You should also open a high-interest savings account, which rewards you for saving each month with bonus interest.
“This is a big factor in how a lender sees you as a borrower,” Tsouvalas says. “If you have a savings account you don’t touch, it puts you in a very favourable light.
“Also don’t be afraid to ask around for a borrower partner or guarantor – this can sometimes half the amount you need to save. But be careful when getting into business with someone around property, so you need to do your homework first.”
Author: Bill Tsouvalas is CEO and managing director at Savvy. He has a been working in the mortgage and asset finance industry for over 10 years. He often writes articles on mortgage, finance, and insurance topics.