Aspiring homebuyers in Australia are facing the worst affordability conditions over the last 30 years — this means that saving for a home loan deposit remains a struggle. But what can these potential homebuyers do to achieve their goals, even in small steps?
For Anson Parker, a home loan expert and the chief product officer of Up (a brand of Bendigo and Adelaide Bank) it is crucial for homebuyers to be realistic with their expectations.
“Let's be real. It's going to take a while to save a deposit, years probably,” he told Your Mortgage.
Mr Parker said having unrealistic expectations on how long it takes to save is one of the many common pitfalls borrowers fall victim to when it comes to saving for a deposit.
Trying to save with will-power alone is also a typical pitfall — Mr Parker said sacrificing lifestyle by never eating out and moving back in with parents is not going to work for everyone.
“Most of us want to maintain some sort of quality of life along the way — but beware the temptation to save based on your ‘leftover’ money after living," he said.
"Not having a deliberate strategy, or proactively adjusting to life while saving, hoping it just happens automatically, could see you treading water and making little progress.”
Determining a savings goal
Mr Parker said the size of the deposit is usually the biggest factor that determines the savings goal of potential homebuyers.
“When you're saving for a house deposit you'll never really be done saving until you've bought a house — it's common for you to need to revise your goal, or even the location, or size of the home you can afford, as progress on your journey,” he said.
While many lenders typically require a 20% deposit, there are government programs like the First Home Guarantee that can help borrowers enter the property market with as little as 5% deposit.
There are also home loan providers that offers an option to borrow with a 10% deposit. Borrowers must keep in mind, however, that a deposit of less than 20% usually entails paying for lenders mortgage insurance (LMI), unless they apply for the Home Guarantee Scheme.
Starting a budgeting strategy
Saving for a home loan involves creating a budget, and having a budgeting system often starts with separating needs from wants.
Mr Parker said borrowers must determine what their needs are, like rents and other bills, to determine how much they could really work around.
“This is a good opportunity to make sure your regular bills are things you really need, or consider whether you might get a better deal on some of these by shopping around,” he said.
Up’s Regulars feature provide visibility of the borrowers’ needs, with the remaining spending falling into the wants category.
“You typically have a greater ability to change these as they generally reflect your behaviour – how often are you buying lunch or dinner vs cooking at home. How much are you spending on new clothes?” Mr Parker said.
“It can be useful to work backwards from a savings goal here. For instance, what kind of money do I have for this stuff if I was saving 20% of my income? Does that seem sustainable?”
Another Up feature called Trackers allows borrowers to set spending targets on any of its 40 spending categories. This feature enables borrowers to track these targets by providing regular updates and notifications.
A budgeting strategy will also depend on the borrowers’ savings behaviour — for example, they can consider is splitting out a percentage of their monthly income into a home deposit saver.
“On Up, that means setting up a pay split or automatically splitting out a portion of your pay before you're tempted to spend the money or have it influence your spending decisions,” Mr Parker said.
A little goes along way when saving — Mr Parker said the Round Ups feature of Up creates a good savings habit among borrowers.
“Up lets you round up purchases into any of your savers and better still, boost those round ups with additional amounts from $1 to $10. Upsiders have saved around $150 million with round ups alone in the last year,” he said.
Creating a home loan wishlist
Given the uncertainty on the Reserve Bank of Australia’s monetary policy, it is easy to assume that interest rates are the biggest consideration when looking for a home loan.
However, Mr Parker offered a different perspective on the matter, especially for those who are still saving for their mortgage deposit.
“Rate increases can, in some ways, be seen as a positive — they can put downward pressure on housing prices and boost savings interest, but they can also make it harder to secure or pay off a home loan,” he said.
“When rates are high, we typically see far less first-home buyers entering the market, and that's certainly the case in Australia right now.
“The thing to realise is that no one really knows what's going to happen with rates, and given the many months or years you likely still have to save your deposit they could be in a very different place by the time you're ready to buy.”
While rates do matter, especially for those who are already trying to apply for a home loan, it does not necessarily mean everything when trying to save on mortgage costs.
“The way you can really save big on your home loan is to contribute additional funds over and above your required minimum payments,” Mr Parker said.
An offset account would help. Up Home, for instance, converts borrowers’ savings accounts automatically into offset accounts, reducing the amount of interest they are charged on their loans.
Another way to save on costs is choosing a home loan with no monthly fees — Mr Parker said these regular fees can add up in the long run.
“Putting the money you would have spent on fees into paying your loan off faster can deliver a huge saving,” he said.
Changing the mindset
Mr Parker said it pays to be realistic when saving for a home loan deposit.
“You need to ignore those unrealistic headlines the media loves to run: ‘24-year old saves deposit in six months, plans to own her home outright by 30’ — saving for a deposit is a marathon, not a sprint,” he said.
“The speed at which you can save is going to depend on your income, lifestyle and whether you have outside help like parents.
“Try it out — is it easy, hard? What sacrifices do you need to make to meet it? You might then be in a better position to dial it up or down,” he said.
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