How to save for a house deposit
Saving up enough money for a house deposit can seem like an insurmountable task. But it's not impossible - it just requires discipline and lots of saving.
Borrowers are recommended to save 20% of the purchase price of the house they’re planning to buy. A larger house deposit means less money you have to borrow. By borrowing less, you may pay less interest and save more on your loan.
Putting down a larger house deposit is ideal. It can be difficult but not impossible—all it requires is more effort, discipline, and a lot of planning.
A quick guide: How to save for a house deposit
A house is one of the most expensive purchases you’ll ever make. It’s why saving up for the house deposit is so important. You’re proving to the lender that you can afford to cover the cost of the loan. Use these steps to guide you to saving a sizeable deposit for a home:
Step 1: Know how much you need to save
How much should you have saved up before buying a house? A lot of lenders suggest a loan-to-value ratio (LVR) of 80% which means 80% of the property value will be loaned out to you while the 20% will be your house deposit.
It is possible to take out a home loan with less than a 20% deposit. Some lenders allow up to 95% LVR, this means you can put down a 5% deposit for a home. Keep in mind, if you put down less than a 20% deposit, you’ll need to pay Lenders Mortgage Insurance (LMI). The added LMI expense could run up your costs significantly.
Step 2: Decide on the amount of deposit for your home purchase
Weigh the pros and cons of having a higher deposit versus a lower one. Many lenders may offer a lower interest rate to borrowers who can provide a larger deposit for a home.
A lower interest rate can help you save thousands over the life of the loan. The way lenders see it, the more money you can provide upfront, the less risky you are as a borrower. Reduced risk means less chance of the lender losing money if you default on the loan.
Discuss your options with your lender or a professional so you can make an informed decision on the best deposit amount for you.
Step 3: Review your finances and spending
Once you’ve decided on an amount, it’s time to start saving. Take a good hard look at your finance and spending habits. To build a budget and save for a house deposit, you need to be able to account for every dollar.
Step back and assess your finances objectively. Figure out how much you’ll be able to save to reach your home loan deposit goal. Tally up your monthly expenses to figure out which areas you can cut back and save more on. Include your savings in your financial review to see how much of it can be put in your house deposit fund.
Step 4: Assess your lifestyle
After analysing your spending, you need to assess your lifestyle. As yourself how much you’re willing to sacrifice to reach your target deposit for a home. This doesn’t mean doing away with all your leisure activities or never spending money on non-essentials. All you need to do is figure out where you can cut corners so you can save money faster.
Look at the discretionary items you currently spend money on and ask yourself how much you need or want them. Instead of going on a month-long holiday, opt for a week-long one. Cut back on your subscriptions for the time being while you’re saving up for a deposit for a home. Or if you’re renting, moving to a less expensive apartment can help speed things along too.
If you are willing to sacrifice your current lifestyle temporarily while you save up, put your plan into action by trimming out any non-essential spending and building a budget.
Step 5: Create a budget and stick to it
You’ve decided on a home loan deposit amount, reviewed your finances, and figured out where you can cut back. It’s time to put pen to paper and finalise your budget and follow it diligently.
When budgeting, most use the 50/30/20 rule which translates to 50% for necessities, 30% for 'wants', and 20% for savings. Since you’re saving up for a home loan deposit, you can tighten your belt a bit for the 30% allocated for ‘wants’ and bump up your savings a bit more.
You may want to consider storing your savings in a high-interest savings account or even consider utilising an asset class such as shares, to get the most out of your savings.
What are my options when taking out a home loan?
Aside from saving up for a home deposit, there are some avenues available to home buyers to help lessen the load. Below we answer commonly asked questions when saving up for a home deposit:
Can I use my super as a deposit?
Not exactly. While you can't really raid your superannuation fund for a house deposit, you can leverage your super through the First Home Super Saver Scheme (FHSSS).
First Home Savers can make voluntary concessional and non-concessional contributions to their super fund. This money can be withdrawn later for a house deposit. The concessional contributions are taxed at 15% while the non-concessional contributions are taxed at your marginal rate.
Can I use my inheritance or a gift as a deposit?
You can use money you received as a gift or inheritance to supplement your home loan deposit fund. If you don’t want to use the funds for your deposit, gifts or inheritances can also be used as genuine savings (i.e., money that’s been saved over time—typically between three to six months) which can help bolster your loan application, as well.
Lenders look at your genuine savings to gauge whether you're likely to make timely repayments. Some lenders may need to verify that you have a certain amount of genuine savings if you can’t provide a 20% deposit for a house. Very few lenders will accept a 10% deposit without the need to confirm genuine savings.
Can I use the First Home Owners Grant as a deposit?
If you're a first home buyer and you're using the First Home Owners Grant (FHOG) you can technically use this to form part of your deposit if you're buying or building a new home. The amount of financial assistance varies from state to state.
Get in touch with a local real estate agent or contact your local government to discuss the requirements. Keep in mind that the subsidy you receive may not cover the whole home loan deposit. Be aware of the limitations of the grant so you can adjust your budgeting while you save for your home loan deposit.
Can I get a 100% mortgage?
Although not advisable, it is possible to get a 100% home loan but very few lenders provide that type of loan. Usually, you still need to present at least 5% in genuine savings when you have a 100% LVR. You’ll be required to get an LMI too. Some lenders may only provide a 100% home loan if you have a guarantor.
Are there other factors you need to consider when applying for a home loan?
Aside from the deposit, you should also consider the following when you’re applying for a home loan:
Credit score
Having a good credit rating can help you borrow more money from a lender or get the best interest rates possible. To improve your credit, you can pay back any outstanding debts, close unused bank and credit card accounts, and ensure your credit report is correct.
For the best credit rating possible, you need to adopt good spending habits. This means paying your bills and loans on time, not going over your credit limit, and applying for necessary loans only.
Stamp duty
Stamp duty is a major cost you need to factor in when saving for a house deposit. Stamp duty is the tax on the sale of the property and shares. If you’re a first-time home buyer, there are stamp duty discounts available in most states and territories. Depending on the purchase price of your property and where you're buying, you may even be exempt from stamp duty.
Enter your details into our stamp duty calculator to work out how much stamp duty you may have to pay.
Savings
Lenders also look at a borrower’s financial situation which includes your savings. If you have a significant amount of savings in your bank account, this shows lenders that you’re responsible with money and have healthy spending habits. Lenders will look more favourably at borrowers with genuine savings grown over time.
Find out how much you should save for a house deposit
Use our home loan calculator to see your potential monthly repayments. With this tool, you can adjust the loan amount minus your ideal deposit and see how that can affect your monthly repayments.
To learn more about your home loan options, get in touch with one of our friendly lending specialists. Or get your home loan pre-approved!
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
