Guide to Saving for A Home Deposit
When property prices are rising it can feel like you’re getting left behind. When buying a house, saving for your first home deposit can seem like a never-ending task. But worry not, we’ve pulled together the following information to help you consider options to help you save for a home loan deposit.
How much do I need to save for a home loan deposit?
Now this varies depending on each lender’s requirements. While you can get on the property ladder with as little as a 5% deposit, there are reasons to continue saving to the 10% and 20% deposit marks, as it could help you avoid paying extra fees and may also benefit from a wider range of lenders and more competitive interest rates.
Why save a 20% deposit?
Lower repayments
Lower interest rates
Lenders Mortgage Insurance
Can I get a home loan without a deposit?
Although you'll need to put a deposit towards a property (unless you're refinancing in certain circumstances), some lenders do offer mortgages starting with as little as a 5% deposit. This is usually the minimum you'll need to contribute towards a property, however you'll have more loan options when you save up a 10% or 20%+ deposit.
What exactly is Lenders Mortgage Insurance (LMI)?
Saving the deposit for your first place can be daunting. Most lenders won't talk to you unless you've saved up at least 10% of the property price, plus the money to cover government and legal fees. Many lenders also keep their best home loan deals for those who have at least a 20% deposit.
With today's house prices, that's some serious money that you'll need to save. You'll hear loan to value ratio or LVR a lot when you're comparing home loans. Thankfully, it's easy to understand. It's just the amount you need to borrow compared to the price you're paying for your property. So the larger your deposit, the lower the LVR.
This will determine what lenders you can apply to, what interest rates you'll be eligible for, and what risk fees you might have to pay.
Risk fees, yeah, you heard that right. If you're applying for a loan with an LVR above 80 which means you've got less than a 20% deposit, you'll often need to pay Lender's Mortgage Insurance or a similar risk fee. These fees can range from a few thousand dollars to tens of thousands of dollars depending on the lender and your property price.
This protects the lender in case you default on the loan and they need to sell the property at a loss. While there isn't any direct benefit to the borrower, it does mean you can get on the property ladder with a smaller deposit.
As you save more towards a property, the LVR decreases and home loans usually become more competitive. Say hello to better interest rates and lower or even no risk fees.
So if you want to get the lowest interest rate possible and avoid paying LMI or a similar risk fee then you'll usually need to save up at least a 20% deposit and have an LVR of 80.
However, with house prices rising, waiting to save up that extra deposit may see you priced out of the market, so you might consider it worth paying the extra fees to get your foot in the door sooner. You'll also need to keep some cash aside to pay for your legal and settlement fees, not to mention the cost of furnishing your property. It's a lot to weigh up. If you need any more hints and tips for your home loan journey then visit peppermoney.com.au. We're here to help.
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 amount each month for ‘one off’ expenses like new furniture or a trip away.
Want to learn more about how to create a budget? The ASIC MoneySmart website provides easy steps to plan and manage how you spend your money. If you’re self-employed, you may already be reviewing the budgets for your business – in which case, read our Real-life guide to home loans for the self-employed.
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.
If you’ve missed a payment or defaulted on a utility bill, credit card or personal loan in the past, then you might find yourself with a less-than-stellar credit score. If you’ve got credit repayment issues, getting a home loan can be a challenge. Our real life guide talks through the steps you can take to help improve your credit situation.
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 it may help you to plan your incomings and outgoings more carefully..
Taking this a step further, you might choose to have multiple savings accounts – each with its own purpose. For example – an easy-access savings account that can be easily dipped into 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 house 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 dramatic lifestyle shift, the cumulative savings over six to twelve months could be significant and might supercharge the deposit required for your home loan.
Looking for more ways to save your home loan deposit? The MoneySmart website provides some great strategies to help save for your home loan deposit.
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. So, it’s all your money, right? Well… certain lenders may see things differently. It’s important to check where the savings have come from and how they may be viewed by certain lenders.
What are genuine savings?
Lenders all have varying definitions as to what constitutes ‘genuine’ versus ‘non-genuine’ savings. As a rule of thumb, genuine savings are:
Within a savings account
Older than three months
Are shares and stocks considered genuine savings?
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 a large 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 lenders.
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