SAVING FOR A DEPOSIT
- Written by Melanie Toye, November 8, 2011
Owning your own home is still the dream that most Australians have. Attaining this dream is becoming more difficult as the jump in property prices in the last decade has been enormous. The biggest hurdle is saving money for a deposit to buy your first home. A good sized deposit and demonstrating a capacity to save can greatly improve your chances of getting a loan. Here are some tips to help you get started.
WHEN IS THE BEST TIME TO SAVE MONEY FOR A DEPOSIT?
The best time to start saving money for a deposit is today. Save as much money as you can. Try to save 20 – 30% of your wages if you can afford it. This will maximize your savings. The larger the deposit, the less money that you will need to borrow.
DEVELOP A SAVINGS PLAN
Plan how you are going to spend your money every week. The best way to start saving for a deposit is to save a set amount of money into a high interest savings account that has low fees. Make sure you deposit your money into your savings account every week. Then you pay your living expenses (food, bills, petrol, etc) and you can spend the rest on whatever you want. The trap that many people fall into is that they plan to save whatever money is left over, and there never is money left over because people always find something to spend their money on.
CREATE A BUDGET
Sit down and assess your financial situation. This will give you information to create a budget. Take a look at how much money is coming in, and where you are spending your money. You need to have more money coming in than going out. If you are spending more than you are earning then you will need to cut down on your spending. Exercise some constraint on where you spend your money but also allow yourself some pleasures. You want to create a budget that is realistic so that you can stick to it.
PAY OFF YOUR DEBT
Take a look at what debts you have and make a plan as to how you are going to pay them off. The banks charge higher interest rates on credit cards than they pay to savings accounts. It’s best to pay debts off first, if possible. The amount that you owe on debts such as credit cards, personal loans, etc. will affect your chances of getting a home loan. It will reduce your capacity to make the loan payments, therefore reducing the amount of money that you can borrow. The banks want to see that you are organized and in control of your finances. The less money that you are paying on your debts, the more money you will have to pay on your home loan. You can cut years off your home loan by paying a little extra on your repayments each month.
ASSESS THE PROGRESS OF YOUR SAVINGS
Once you have set a savings goal, you should review the progress that you are making in accumulating a deposit. This should be done on a monthly basis. Look at how much you have saved, and compare it to how much you should have saved according to your plan. This allows you to make adjustments to your spending in the event you are not saving as much as you aimed for.
CAN I SAVE MONEY IF I AM RENTING?
You will have to evaluate your particular circumstances to ascertain whether you can save while you are renting. Sometimes it is better to live in a rented property as the rent you are paying may be less than the interest you will be paying on a home loan. You can pocket the difference. The major thing that you have to do is keep an eye on the economic climate and the property market. If property prices suddenly increase rapidly, then you may have to pay a much higher price for the property you want to purchase. Another option may be to move back home with your parents so you can maximize your savings.
FIRST HOME SAVER ACCOUNT (FHSA)
The first home saver account is a government scheme that encourages people to save money for the purchase of their first home. This is done by opening a savings account, that can be set up at your bank. It’s a special type of savings account where the government makes contributions equal to 17% of the first $5,500 that you have contributed each year, which amounts to $935. You need to deposit a minimum of $1000 per year for 4 years. The investment earnings in this account are taxed at a maximum of 15%. The major drawbacks to this scheme are that you can’t access your savings for a minimum period of time which is usually 4 years. If you purchase your first home before the 4 years, then once the 4 years are up, you can deposit the savings into your mortgage. Another drawback is that if you change your mind about purchasing a property, then you can’t withdraw your savings. The money has to go straight into your superannuation fund. Before setting up a first home saver account make sure that you understand all the conditions of the account.
For more information visit your bank or go to the ATO website.
FIRST HOME OWNERS GRANT (FHOG)
The First Home Owners Grant is a government grant given to eligible first home buyers. If you are eligible you can receive $7000. See conditions for FHOG.
WHEN IS THE RIGHT TIME TO BUY A HOME?
As your savings increase you need to take a keener interest in the property market. Keep an eye on what is happening and look at potential trends that may affect your future purchase. You can read articles in the papers relating to the property market and also keep track of properties that are similar to what you are looking to purchase. Follow these properties until they are sold so that you can get an idea of how much you need to spend. You can talk to the agent that sold the property to get information. This may enable you to identify patterns on price increases or decreases. You want to be in a position to take advantage of any favorable or bargain purchases if they present themselves.
ASSESS THE PROGRESS OF YOUR SAVINGS
Once you have set a savings goal, you should review the progress that you are making in accumulating a deposit. This should be done on a monthly basis. Look at how much you have saved and compare it to how much you should have saved according to your plan. This allows you to make adjustments to your spending in the event you are not saving as much as you aimed for. Make a list of things that you can cut back on so you can maintain your savings.
The information provided here is general in nature and anyone intending to apply it to practical circumstances should seek professional advice to relate it to their individual situation.
For more information about getting a home loan contact Australian Mortgage Managers on 1300 799 266.
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