Saving for a home

Building your savings

Buying a house is exciting and life-changing. What's not as much fun is saving for the deposit. But the more money you put down upfront, the less you'll have to borrow. There are many ways to save for a home. With a good savings plan and some discipline, you'll soon have the deposit for your home.

How much do you need to save for a home?

Work out what you can afford

Be realistic. You may need to consider a smaller property, an older property, or a property in a different area, just to get you started in the property market.

Work out how much you can afford to borrow.

Mortgage calculator

Here is an example of what your calculations might look like once you work out the amount you can afford to borrow:

Amount you can afford to borrow + deposit saved - fees & charges* = Amount you can spend on a property

To work out how much you need for a deposit, your calculation might look like this:

Amount you need to buy the property + fees & charges* - amount you can afford to borrow = Deposit you need to save

* Fees & charges could include stamp duty, legal fees, loan establishment fees and lender's mortgage insurance.

Check out property prices

The property market is always changing. To get an idea of property prices in the area you want to buy:

  • Have a look at online real estate websites
  • Go to auctions
  • Read the property section in your local newspaper

Video: Mark saves for his first home

Video about saving for a home.Watch this MoneySmart Teaching video to find out how primary school teacher Mark starts saving for his first home.

Transcript: Mark saves for his first home

Check your loan to value ratio

When thinking about how much to save, check your loan to value ratio (LVR). This is calculated by dividing the amount of your home loan by the purchase price (or appraised value) of the property.

Lenders use your LVR to gauge how risky it would be to give you a loan.

In general, the higher your LVR, the higher the risk the lender will not be repaid if you default on the loan and they have to sell the property. Having a high LVR may also affect your ability to refinance your loan later on, and you may have to pay mortgage insurance again if the LVR on the new loan is high.

Usually lender's mortgage insurance (LMI) is payable if your LVR is above 80%. This is a one-off insurance premium to protect the lender should you default on your home loan.

Some lenders also use your LVR to work out the interest rate on your home loan. For example, if your LVR is more than 80%, you could be charged a higher interest rate than a borrower with a lower LVR. This could make a big difference to your repayments, so it is important to save as much as you can towards a deposit to reduce the size of your loan and try to get your LVR under 80%.

Case study: Jade works out her loan to value ratio

Young woman working out her loan to value ratio

Jade wants to buy a one-bedroom apartment. She estimated this will cost $500,000 in her preferred area. After doing a budget, she calculates she could afford to take out a $450,000 mortgage, so would need to save a deposit of $50,000 plus purchase costs.

She checked her loan to value ratio:

$450,000 loan ÷ $500,000 property value = 90% LVR

With an LVR above 80%, Jade realises that she will be charged lender's mortgage insurance (LMI) by her lender, so she added this to the estimated costs she needs to save for.

Ways to build your home deposit faster

Develop a plan to help you save towards your deposit. Work out how long it will take you to save your deposit and how much you need to regularly put aside.

Set, plan, track and manage your savings goals.

TrackMyGOALS

Cut back on the extras

The easiest way to see where you can cut back is by doing a budget. Write down your essential costs, such as rent, bills and food, and subtract this amount from your income. What is left over is what you could potentially save for your deposit.

See where your money is going by tracking your personal expenses on the go. 

TrackMySpend

Give yourself some leeway - if your budget is too tight, it is harder to reach your target. So don't cut out all your fun expenses. A good idea is to set smaller savings goals along the way and reward yourself when you achieve them.

Case study: Penny saves her deposit

Young woman saving for a home depositPenny set herself the goal of buying her apartment in 4 years time. She looked at her budget and identified several ways to save for her deposit. She opened a high-interest online savings account and arranged for part of her salary to go into it each fortnight. She also reduced her expenses by cancelling her gym membership, cutting back her mobile phone bill and limiting herself to one dinner out a month.

After 4 months she had saved $4,000 so she rewarded herself with a dinner at her favourite restaurant. In 1 year she saved almost $13,000 and after 4 years she had over $56,000 for her deposit.

Moving into the family home

While it may not seem that appealing, many young people choose to move back into the family home while they are saving for their first house. Rent is likely to be one of your biggest expenses, so if you can cut this right down, you could increase your savings very quickly.

Get a high interest savings account

Once you know how much you can save, make your money work for you. If you leave it in your everyday transaction account, you might be tempted to use the cash. You will also earn less interest than you would by transferring your savings to a high-interest savings account.

Investing your savings

Have you thought about investing your savings in shares or a managed fund? This is a good idea only if you plan to buy your home in a few years time because these investments are suited to long term goals. For more information see investing.

First home super saver scheme

In the Federal budget announced in May 2017, the Government proposed a new scheme that allows first home buyers to save a home deposit within their super fund.

Under the scheme, you'll be able to make voluntary super contributions, within existing contribution caps, and from 1 July 2017 up to $15,000 of those voluntary contributions made in a financial year can be withdrawn to purchase your first home. The maximum that can be released is $30,000 in total, plus an amount that represents deemed earnings.

Withdrawals can be made from 1 July 2018. Non-concessional contributions and earnings can be withdrawn tax free. Concessional contributions and earnings will be taxed at marginal tax rates with a tax offset of 30%.

You can't take advantage of this just yet as laws still need to be passed to make this change happen. More information is available on the Government's budget website.

Buying a home is a big step and it's easy to be daunted by the large sums of money involved. With careful budgeting, saving money towards your own home is made much easier.


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Last updated: 01 Jul 2017