We know it can be daunting but it’s not impossible, so we’ve put together some steps and tips you can follow to save for a home deposit while you pay your rent, bills and still enjoy some luxuries.
Steps to saving a home deposit
- Work out your deposit size – how much do you need to save?
- Save - set a realistic budget, manage your debts and cut some of your expenses.
- Bonus - get outside help with your deposit if you can.
1. Work out how much you need
Firstly, you’ll need to figure out how much you need to save. This will depend on the house you’re planning to buy but in simple terms, the bigger your deposit, the smaller your home loan and the less you’ll pay in interest. The more you can save the better, but a good benchmark to work towards is 15-20% of the property price you’re aiming for. Check out our borrowing power calculator to get an idea of what size home loan you can get.
Lenders Mortgage Insurance (LMI)
If you manage to have a deposit of 20% of the value of the property, then you can avoid the extra expense of LMI – which you will need if you borrow more than 80% of the value of a property.
You can also avoid paying LMI if you qualify for one of the Australian Government's Home Guarantee Scheme options, which include the First Home Guarantee, Family Home Guarantee and Regional First Home Buyer Guarantee. The scheme is all about helping eligible home buyers purchase a home sooner with a low deposit and without the need for LMI.
However, if you don't have a 20% deposit or qualify for the scheme, here are some examples of what LMI might cost you depending on your deposit size.
LMI you’ll pay
No LMI payable
These are estimates only, taken from the Credit Union SA Buying and Selling Costs Calculator. All estimates are for first home buyers, LMI costs are slightly higher for non-first home buyers.
Paying $14,681 in LMI when you have a 10% deposit seems steep, right? That’s why a lot of people opt for the Home Guarantee Scheme or wait until they have a 20% deposit. But, if you don’t qualify for the scheme and you’re happy to roll with a 10% or 15% deposit, the good news is that most lenders bundle your LMI in with your home loan amount - so you don’t have to pay upfront.
Stamp duty is a form of tax charged by the state government when you buy a property. Unlike LMI, you will need to pay stamp duty upfront when you buy your property. Stamp duty varies depending on what state you live in. South Australian stamp duty usually costs around 4% of the purchase price of your property.
However, you could avoid paying stamp duty in SA if you're a first home buyer purchasing a new home valued (that's never been lived in) up to $650,000 or buying vacant land (to build on) valued up to $400,000 and you meet the eligibility requirements.
If you don't qualify for stamp duty relief, here are some examples of what you might have to pay upfront (including stamp duty).
Stamp duty cost
TOTAL amount you’ll need to pay upfront
LMI fee added to your loan
No LMI payable
These are estimates only and are for first home buyers. The stamp duty calculations come from Revenue SA's calculator and are for an Australian resident purchasing a residential home. The LMI calculations are taken from the Credit Union SA Buying and Selling Costs Calculator.
As you can see there’s a lot more to consider than just the deposit amount, when working out how much you need to save for a house. You will need to look at whether you need to pay LMI and what stamp duty will cost you and include it in your total amounts.
Use our borrowing power calculator to work out what you will need to save.
2. Save, save and save
Okay, so now you know how much you need to save (factoring in LMI and stamp duty), it’s time to get to the hard part - saving.
The best part of saving for a deposit is that it will show lenders you’re able and willing to manage your money which is vital when getting approved for a home loan.
For some people saving is second nature, but for most, it takes restraint and dedication. Sometimes it’s just really hard to knuckle down and do what needs to be done.
We understand not everyone will be in a position to save or to try some of our suggestions, but for those of you who are, hopefully some of these tips will come in handy.
Set a realistic budget and save
You’ve probably heard this one many times before but setting a realistic budget and sticking to it is essential to becoming a good saver.
Here are some steps to set up your budget.
Analyse spending habits
Start by analysing your spending habits, no matter how scary they are. Once you have an understanding, you should be able to work out what you can realistically save each pay and what are the things you can reasonably cut back on.
50/30/20 per cent rule
A lot of people use the 50/30/20 per cent rule when it comes to budgeting. The rule sets out that you should spend 50 per cent of your after-tax income on obligations that have to be to be met like rent and bills, 30 per cent on your wants and entertainment, and 20 per cent on savings. If you can somehow manage to change the percentages so that you’re putting more into your savings, even better.
Set up automatic transfers
Once you have figured out how much you’re spending and saving each pay, it’s a good idea to open accounts and set up automatic transfers for things like your bills, rent/board, entertainment and of course, savings. That way you can set and forget, plus easily keep track of where you spend your money and how much you save each month.
Turn on ‘round ups’
By turning on your ‘round ups’ banking app feature, your purchases will be rounded up to the nearest whole dollar and the difference will be transferred into the savings account of your choice (Aka- your home deposit savings account). It’s the perfect way to micro-save with minimal effort – every cent counts.
Basically, if you don’t have a solid budget and strategy in place, it will be almost impossible to consistently save. But remember to be dynamic with your approach, change things as you need to if they’re not working.
Manage your debts
It’s no surprise that paying off your debt as soon as possible can help you save more effectively.
But if this isn’t realistic for you and you have a few debts, for example, a car loan and a couple of credit cards, you might want to think about consolidating them all into one loan. This will give you just one recurring repayment to make over a set term with a single interest rate – making it more manageable. It’s a massive bonus if the interest rate is lower too as this could help you get rid of your overall debt sooner.
Be wary of buy now pay later
For many of us, the temptation to throw a few things on Afterpay or ZipPay is strong and although we can convince ourselves it’s all good because we won’t have to pay interest – it can be a dangerous game to play. Even the most experienced budgeters have been stung by buy now, pay later, forgetting to factor future repayments into their budget. But this isn’t the only reason to be wary. The way you use buy now, pay later could be looked at by lenders when you apply for a home loan – so make sure you use it responsibly or it could affect your chances of getting your loan approved.
Cut your expenses (hear us out)
We believe small changes can make a big impact. In saying that, if you have the opportunity and want to make some big changes like moving back in with your parents or picking up a side hustle to save big bucks in a short time then go for it.
For the rest of us, cutting some small expenses will make a big difference in the long term (even though it may not feel like it at first). We’re not saying never eat out or don’t buy your soy latte but maybe try setting some rules around when you enjoy these treats. For example, you might choose to get Uber Eats on Friday evenings and buy some frozen nuggets and chips from the supermarket to get you by on a Sunday instead of ordering another lot of takeaway.
A quick and easy expense to look at is your subscriptions. Do you actually use all of them? If not, cancel the ones you can live without and put the savings straight into your home deposit account.
These things might seem ridiculously insignificant, but if you cut ten of your small bad spending habits it can add up to one big positive change – more savings.
Find a good savings account that will reward you with a high interest rate and low fees or if you have a sizable amount you could put your savings into a term deposit which locks your money away for a set period. This could potentially earn you more interest and deter you from spending your hard-earned savings.
If it’s going to take you a few years to save for a house, you could consider investing. There’s obviously risk involved, so be sure to do your own research and choose an amount and a product that you’re comfortable with.
Money Smart has an extensive list of investment options and how they work.
3. Get help with your deposit
Depending on your situation, help may be available for you to get into your new home sooner – whether it be from the government, your family or who you bank with.
Home Guarantee Scheme
We’re one of the select lenders able to offer the Australian Government's Home Guarantee Scheme. If you're eligible for one of the guarantee options you could buy or build a modest home with a low deposit and without the need for LMI.
South Australian Stamp Duty Relief
You may be eligible for stamp duty relief if you're a first home buyer in South Australia purchasing a new home valued up to $650,000 or buying vacant land (to build on) valued up to $400,000 and you meet the eligibility requirements.
Find out if you're eligible for relief by visiting the Revenue SA website.
First Homeowner Grant (FHOG)
If you’re a first-time homebuyer in South Australia, you may be eligible for the FHOG. Through the FHOG, you can apply for a grant of up to $15,000 on the purchase or construction of a new residential home in South Australia. This could help you get your home sooner and potentially lower the cost of your LMI or eliminate it altogether if you have additional savings.
Find out if you’re eligible for the grant by visiting the SA Government website.
A family guarantee could help you get into the property market sooner and avoid paying LMI by leveraging equity from a family member’s property.
Your guarantor would accept legal responsibility for your monthly repayments if you can’t pay, which reduces the risk for lenders. It may also be possible to apply the Family Guarantee beyond immediate family members and involve in-laws and step-parents instead.
Getting a cash gift
Cash gifts from family members can be used towards your deposit and might help to lower your LMI premium or avoid paying LMI altogether.
A cash gift may not always guarantee a loan by itself. Some lenders might also want to see that you can support yourself and make repayments. They may look for a steady income as well as evidence of a good savings history. In most cases, you will need a minimum of 5% genuine savings (your own savings) to qualify for a home loan.
Lenders can accept a cash gift as genuine savings, however, there will be a wait involved. You will usually have to leave the cash sitting in your bank account for three to six months. This is to show you can save the gifted funds and are not reckless with money.
Also, most lenders will want to make sure the cash is a gift and not a loan. So, you will more than likely need to present a letter to your lender that states that the giver has no stake in the property, no commercial interest, and no expectation of repayment.
It can be tough to pay rent and bills and maintain your lifestyle while also trying to stash away cash for a home deposit. It takes time, but with a realistic plan in place you’ll be on the right track to get your dream house.
Our lending experts can help talk through your options.
So why not make an appointment with one of our friendly Mobile Lending Managers, who can come to your home or office at a time that suits you. Call us on (08) 8202 7777 between 8am – 8pm weekdays or 8am – 2pm Saturdays. We’re here to help!