Guide to saving a home deposit
When property prices are rising it can feel like you’re getting left behind. At times like this, saving for your first home deposit can seem like a never ending task. Don’t worry, we’ve pulled together the following information to help you save for a home loan deposit. Perhaps you’ll be able to enjoy your new home a little bit sooner.
How much do I need to save for a home deposit?
Now this varies depending on each lender’s requirements, but typically a deposit can be as little as 5% of the purchase price. However, lenders may offer lower interest rates if a deposit of at least 20% deposit has been saved. If you plan on using a low deposit, you will need to be mindful of other costs such as Lenders Mortgage Insurance (LMI) and Stamp Duty - these costs determine the total amount you will need to have saved. Try our Stamp Duty Calculator and Property Buying Cost Calculator if you need help crunching the numbers.
Why should I save a 20% deposit?
Lower repayments
Assuming the loan term is the same, if you pay more deposit the loan amount would be less. This could mean that the weekly, fortnightly or monthly repayments will be smaller.
Lower interest rate
If you pay more deposit the Loan to Value Ratio (LVR) of your home loan will be smaller. As mentioned above, some lenders may offer a lower interest rate if the LVR is below 80%.
Lenders Mortgage Insurance
If you have a deposit of less than 20%, Lenders Mortgage Insurance is usually required. For home loans with a deposit of 20% or more, LMI is not usually required which could be a reason to save up a larger deposit.
What exactly is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a one-off, non-refundable, non-transferrable premium that’s generally added to your home loan balance. It applies when a borrower has insufficient savings or equity to meet the standard 20% equity requirement of the property value. LMI is insurance designed to protect the lender, not the borrower. It provides the lender with indemnity against any loss incurred if you are unable to repay your home loan and the property needs to be sold.
A higher LVR will attract a higher premium as the risk of loss to the lender is deemed to be greater. LMI ensures that the lender is covered for any shortfall if you default on your home loan and the proceeds from the sale of the property is not enough to pay off the loan in full. It’s important to note that the borrower(s) and any guarantors are still liable to pay the shortfall to the insurer. The LMI fee is usually calculated as a percentage of the loan amount and can be paid at settlement or may be able to be added to the loan amount.
How can I save for a home deposit?
First things first, understanding exactly where your money is going every single month is key when saving. Being disciplined can help, too. Here are some strategies to consider that could help boost your home loan deposit.
Create a budget
A handy way to track daily spending is to create a comprehensive budget. Tracking daily, monthly, and annual expenses, can help identify areas where savings or changes could be made. A budget may include regular subscriptions, expenses and outgoings – and can even include a small savings goal – for example, putting a small amount aside each month for a holiday. Our Budget Planner Calculator provides easy steps to plan and manage how you spend your money.
Review your existing debts
Existing debts will be included by lenders when calculating how much money you have available to pay off a home loan. So not only could you be spending your income on interest repayments, but this existing debt could also affect your chances of getting a home loan in the future.
Examples of debt could include credit card payments, car loans, personal loans, student loans, school fees and any other long-term expenses that you pay on a regular basis from your regular income. If you review your existing debts as well as creating a budget, then you might be able to save up a deposit more quickly.
Be strict with your savings
Is the urge to splurge affecting your ability to save? One possible way to avoid the temptation of spending your pay is to transfer money out of your daily account, into a separate savings account. This measure could also help you create a budget – if you only have a certain amount to spend every month, then you may need to plan your incomings and outgoings more carefully to avoid going into the red.
Taking this a step further, you might choose to have multiple savings accounts – each with its own purpose. For example – a savings account that can be easily accessed for unexpected bills or emergencies, as well as a higher-interest savings account for longer-term savings. This combination could help with everyday cashflow and assist in future savings for your home loan deposit.
Consider temporarily downsizing
Another way you could look to put away some extra savings is to re-evaluate your fixed outgoings, such as your rent. When trying to save for a home loan deposit, some options for renters could include downsizing or moving into a cheaper property, sharing the rent with a house mate, or even to consider moving in with family to save on rent.
While this may seem to be a dramatic lifestyle shift, the cumulative savings over six to twelve months could be significant and might supercharge the deposit for your future home loan.
What’s the difference between genuine and non-genuine savings?
Let’s now assume that you’ve done all the hard work and that you’ve saved your home loan deposit. It’s all your money, right? When it comes to your savings, some lenders may see things differently. It’s important to check where the savings have come from and how they may be viewed by certain home loan lenders.
Lenders all have varying definitions as to what constitutes genuine versus non-genuine savings. As a rule of thumb, genuine savings are savings that have the following characteristics:
have been held in the borrower’s account for at least three months to six months
are shown as regular transactions into a savings account
meet your regular financial commitments without accessing the savings.
Are shares and stocks considered genuine savings?
Some lenders may consider publicly traded shares to form part of your genuine savings if they are held in one of the borrower’s names.
What are non-genuine savings?
Savings may typically be considered non-genuine if they have not been in the borrower’s account or held for at least three months. This often occurs when receiving a lump sum inheritance or funds from the sale of an asset, like a car. These non-genuine savings may still be able to be used towards a deposit if they are left in a savings account for at least three months. However, this does vary between all lenders.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.