It can be tough to save for a home deposit, but it’s not impossible if you follow these five golden rules.
We’ve always made big sacrifices for the security of owning our own home. So, the debate about whether buying property now is harder than it was in the past doesn’t really resonate with me.
The truth is, it’s always been tough to buy property.
Good homes in nice suburbs have always been expensive relative to the average income, and people have always had to make sacrifices to scrape together enough money for a deposit.
If you’re looking to buy your first property, here are five savings mantras to help you get there. I’m not saying it’ll be easy, but in the long run it can be worth it both financially and lifestyle-wise.
Rule 1: I will set goals
The first step when you are knuckling down to save for a home deposit is to work out when you want to buy. Then ask yourself how much you can realistically afford to spend and how much will you need to save?
Once you have this big, hairy goal to work towards, make a plan about how to get there.
It helps to break it down into more manageable steps, like committing to save a certain amount each month, week or even each day. What can seem a massive number is so much more achievable when broken down to a daily amount. For example, $50,000 over 2 years is $68.49 a day which, for a couple, can be cutting down on takeover coffee and making your own lunch rather than buying it.
But don’t think any of these things will just happen… it takes discipline.
Build a budget to get on top of cash flow and always think of your savings first by setting up a regular automatic transfer.
This will help: 22 financial habits that will help you reach your money goals
Rule 2: I will make sacrifices
According to the Residential Property Price Index, the median price of residential dwellings in Australian capital cities is $779,000.
A 10 per cent deposit means you’ll need to front up $77,900 before costs like stamp duty and Lenders Mortgage Insurance. And that’s before making a single repayment.
But wait, there’s more: Look out for the extra costs of buying a home
For most people, saving an amount that large means serious sacrifice. So prepare to do the hard yards and cut back on life’s guilty pleasures.
Here’s a tip: when times get tough, think about why you want to buy in the first place. For us, it was always easy to make sacrifices and save for a home deposit when we thought about the long-term security of our growing family.
Rule 3: I will focus on my career
Forget the property you want to buy; your income is your biggest asset and the higher it is the more you can save for a deposit.
So invest in your career to maximise earning potential. Why not enroll in further study, take a course to improve your skill set, or simply knuckle down and get noticed at work?
Remember, a bigger deposit means lower repayments, less interest charges and hopefully brings forward that magical date when you’re finally debt-free.
Rule 4: I will invest my money wisely
Building a deposit isn’t going to happen overnight, so with time on your side it could make sense to invest some of those savings and increase potential returns.
Over the long-term, letting cash wallow in a bank account earning low interest means the real value of that money is eaten away by inflation. You can guard against this by sensibly investing savings in higher risk dividend paying blue chip shares, managed funds or higher interest term deposits.
Rule 5: I will be realistic
My final piece of advice, especially in today’s market, is to be realistic.
With low interest rates and rising house prices, it’s easy to get carried away and borrow more than you should.
But remember rates have historically been much higher and can change very quickly. Taking on too much debt now could mean trouble down the track. For example, a 1 per cent rise in interest rates on a 5 per cent home loan rate means a 20 per cent rise in repayments.
This means being practical about property. It’s a long-term game and your first home doesn’t have to be perfect (and it probably won’t be).
But play it safe and, over time, hopefully you’ll be in a position to upgrade to the home you’ve always wanted. And by that stage you’ll have earned it.
This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.