Personal Budget Part2 – Putting your budget to use: saving for a house deposit

Now that you have a budget in place and know exactly where your money goes… It’s the “exciting” (said no one ever)… Process of saving for a deposit for your first home. Now depending on many variables like: 1/ Your income? 2/ If you are single or buying with a partner? 3/ If you live at home or pay rent? It will determine how long it will take you to save for your house deposit.

Your chosen method of sale will also dictate the amount needed. If you are not familiar with the process read Property Purchasing in Australia – What the typical process looks like to give you an idea of the different structures and types of sales. Choosing the Right Neighbourhood for You regarding the location where you buy will also determine the overall price and in-turn you deposit needed.

Great news is that if you are buying established? Or building brand new? You may be entitled to some extra help from the government! This comes in the form of the “First Home Owners Grant”. To find out if you’re eligible more information can be found here lifting the FHOG. The great thing about the First Home Owners Grant is it can help you achieve owning your own home a little sooner.

I want to point out that it’s worthwhile saving for an extra few months for any unforeseen expenses. Preparing for your 1st Home not only simply means saving for your deposit, if you haven’t already why not think about your first shop? Keeping a little aside for hidden or unforeseen emergencies? Perhaps starting a Glory Box? All this will help and alleviate pressure once you’ve moved in… And those extra bill’s start coming in that are associated with home ownership. More on that in Personal Budgeting Part3 – How to adjust your budget after your first home.

For now let’s focus on achieving that goal of saving enough for a down payment on your own slice of the Australian dream.

It doesn’t matter if you live in Sydney, Perth, Hobart or a small country town like PtLincoln! The principles are going to be the same. You are going to want to aim for a 20% deposit no matter where you live. Why 20%? That’s the magical number that any lending institution will slap you with LMI  (Lenders Mortgage Insurance) if you borrow more than 80% of the property’s value.

LMI is an Insurance that the banks or lending institutions make you pay for just in case you default on your mortgage! Be under no illusion it’s the bank/lending institution that it protects and not You! I want to stress that LMI is to protect the lending institution/bank for the shortfall in case of a mortgagee sale. It will not protect you if you default on your mortgage payments and is often quite expensive. The total of the premium will be added to the total amount borrowed. This is know and referred to as Principal amount. For more in-depth information relating to loans you can refer/read What is the difference between Principle vs Interest Only Home Loans?

The total premium for the Lenders Mortgage Insurance is determined by the total amount borrowed. For example, if you borrow $297,500 to buy a property valued at $350,000 you are borrowing 85% of the property value. Therefore your Loan to Value Ratio (also known and referred to as LVR) is 85%. Any loan over the 80% needed to buy the property will require Lenders Mortgage Insurance. LMI is calculated by a premium table that works on a sliding scale. The more you need to borrow the higher the premium.

Also I want to point out so it’s crystal clear! LMI is added onto your overall principal (total amount borrowed) meaning any interest calculated is with this LMI figured on top! This means you will potentially pay even more for your home. You can now see the importance of having a substantial deposit!

Initial Deposit Required:

Let’s get back to your deposit. Your total amount needed will essentially be dictated by the area you are willing to live. For example the closer you want to live to the heart of the city generally the higher the house/dwelling price will be.

The easiest way to portray this is with the below table:

Property Price                   Deposit Required (20%)
$200,000                              $40,000
$250,000                              $50,000
$300,000                              $60,000
$350,000                              $70,000
$400,000                              $80,000
$450,000                              $90,000
…see a pattern emerging here?

But these figures are huge!! Yep I hear you! But now we know exactly where our money is going thanks to: Personal Budgeting Part1 – How to create a budget and track your spending, we can now put some plans in action  😉

We now need to reverse engineer how long it will take to establish your deposit. So we know 1/ roughly where you would like to live and the average house price. 2/ how much you can save per annum.

So let’s look at an example: A young couple James & Kate are both in their mid-twenties and both live at home. They both have full time good paying jobs fresh out of University. A disposable income of $73,000 each and by completing the budget spreadsheet, they are able to easily save one of their pays per annum ($55,613 p.a.). They could save more but have decided to pay their parents board. Both have small car loans and like having the good “Instagram” lifestyle.

They currently live close to the city but work in the outer suburbs. Whilst travel isn’t their main concern they both agree that a lifestyle closer to hills, in the outer suburbs really suits their personalities and interests. They are also after a house on decent land as they are both outdoorsy peoples. They have a couple of suburbs in mind with price’s ranging from $350,000-$430,000.

So using the top figure of $430,000 their 20% deposit would be $86,000. In order for James & Kate to have enough for their house deposit it would take them $86,000/$55,613 = 1.55 years.

Now doesn’t 1 ½ years sound less daunting than $86,000?

In the meantime you can use this time to research the market thoroughly! Why not download “The Property Buyers Guide” App and attend as many open as you can. By attending opens you want to get a feel for what properties are actually selling for, not just the listed price. Also it’s a wise idea to get to know the agents in the area too! There are often a small handful of homes that don’t go to the market and are sold privately. If you make a good enough impression the agents will actually want to help you too – after all we all like helping nice people  🙂

So if you break down what may seem like a monumental achievement into smaller bite size goals then it’s actually not that bad! …cough cough…

So now you know it’s achievable what next? Personal Budgeting Part3 – How to adjust your budget after your first home.

 

Don’t forget to visit our “Tips & Blog” page for further information on all things Real Estate! And why not download the FREE “The Property Buyers Guide App” while you’re at it 😉

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