What will it take for the bank to lift the rates – and how will it impact property investors?
The stronger than expected recovery outlined in Tuesday’s budget now has leading commenters expecting the RBA could li...
Saving up for a deposit – whether it’s for a home or an investment property – is a time-consuming process, and it can feel like property prices are outpacing your ability to squirrel money away. So what can you do to speed up the process?
How much will I need to save for a home deposit?
As a general rule of thumb, you should save up a deposit of at least five per cent of the purchase price of the property you want to buy. On top of this, you will need to ensure you have saved enough to cover stamp duty, conveyancing costs, building and pest inspection fees, and other extras.
However, to avoid additional costs like lender’s mortgage insurance, it is a good idea to save a 20 per cent deposit. Many banks also recommend saving a 20 per cent deposit since it gives you a better chance of securing a home loan, and keeps your loan-to-value ratio (LVR) down.
In some cases, if your parents or other immediate family members own their own property, they can guarantee your loan using the equity on their property, in which case you could be able to buy a property without the need to save a deposit. They will, however, need to have 20 per cent of the purchase price of the property you wish to buy in either cash or equity.
4 simple changes you can make when saving for a home deposit
• Pay off debt
Paying off credit card debt or other loans while trying to save can be extremely ineffective, particularly if a lot of it is only to cover interest. Ideally you will have the majority of any loans or debts paid off prior to saving for your home deposit. This will show the banks that you are capable of steady loan repayments, and also prepare you for impending home loan repayments.
• Create a budget
Sticking to a budget begins with analysing where you spend your money. Creating a monthly budget will allow you to determine if you are overspending on certain expenses, and consequently make the decision to limit this. Once you have a budget in place, it is important to distribute your wage as soon as it comes in. This will ensure the amount you have budgeted for your deposit savings will be held separate to your spending money, reducing the temptation to spend it on other things.
• Make cuts on luxuries
Although it’s not a good idea to cut out all of your regular indulgences at once, you should be making sacrifices if you are serious about saving. For example, if you currently pay for Foxtel, Netflix, and regularly go to the cinemas, you should start to think about which indulgence you can do without, and which cut would give you the most savings for your bank account.
• Second bank account
Opening a second bank account specifically for your home deposit savings allows you to separate these savings from the rest of your income, limiting temptation to spend. Keeping these savings in a long-term savings account, or an account held with a different bank to your primary one, also limits access to the funds, prohibiting any spur of the moment decisions to transfer money across to your spending account.
Additional property savings strategies
Depending on how serious you are about buying a property, there are a number of larger-scale options to consider that will instantly get the ball rolling and bolster your bottom line.
• Move back home
Making the decision to move back in with your parents might be the last thing you want to do, but paying rent while trying to save a home deposit is one of the biggest challenges for first-home buyers. If it is an option, moving back home, or even in with friends, will free up hundreds of dollars a week that you would otherwise be spending on rent.
• Get a second job
Again, this is a life-altering decision, but if you have the time and you mean business about buying a place, a second income can be an instant source of savings.
• Sell some of your unnecessary belongings
Bought an expensive camera once upon a time but never followed through with the photography dream? Have a few too many designer handbags? You might be surprised by how many things you have lying around that could actually be sold online or at a market stall for some extra cash towards your deposit savings.
Have a luxury car on terms? Cut out the monthly payments and unnecessary interest by selling it and buying a cheaper run-around car.
Extra costs to consider when buying property
In addition to saving for your deposit, keep in mind there are other costs involved in the settlement process that you will need to be prepared for.
• Stamp duty
The fee incurred when transferring land or property from one owner to another. The amount varies from state to state.
• Lender’s mortgage insurance
Lender’s mortgage insurance (LMI) protects your lender in the unfortunate case that you are unable to make your home loan repayments. This can be avoided with larger deposits.
• Building and pest inspections
It is crucial to conduct building and pest inspections before making an offer on a property. These typically set you back several hundred dollars.
• Loan application or establishment fee
A one-off fee charged by banks when you apply for a loan.
Investment property loans
Saving up a deposit for an investment property is much the same as saving up for an owner-occupier loan. Investors, however, need to carefully consider how they’ll use their deposit and which loan structure best suits their financial and property goals to ensure they get the most from their portfolios.
A few loan options available to benefit investors include:
• Principal and interest repayments
Choosing to pay off your home loan in principal and interest repayments means there are two parts to your home loan payments. Initially, you pay mostly interest, but later down the track you gradually increase the amount paid on the principal. This is the most common way of paying off a home loan.
• Interest-only repayments
Making interest-only repayments means that for a fixed period of time at the beginning of the life of the loan, the only repayments you make will be to cover interest. Once this period passes, you begin to pay off your principal (the actual asset).
By paying interest only, if the property grows in value within the interest-only period, then equity is automatically built without any of the principal loan amount paid. This is a great option in a growing market.
This option can offer investors great tax advantages since the only part of the finance costs in an investment property that is tax-deductable is interest.
• Construction loan
If you are building a property, a construction loan could be a suitable option because the loan is received in increments as needed throughout the building process.
• Line of credit
A set amount of funds that is accessible for repayments at any time.