Saving for a house deposit is pretty hard but saving for a house deposit in just one year is even harder. That’s why I wanted discuss how to save for a house in a year. This is not going to be an easy task so let me give you some ideas on how you can achieve this goal.
First you need to take some factors into consideration before you start saving.
This is the amount of money that a bank or lender is willing to lend you in order to buy a house. It’s good if you save a deposit for a house but if the bank isn’t going to lend you the money you need then the deposit is completely wasted.
So before you decide on how much you want to save you should contact a mortgage broker and ask about your borrowing capacity. They’re going to ask you a few questions about your life like your employment and dependents and then their software will be able to tell how much you can borrow. This will be powerful when saving your deposit because once you have saved up enough you can actually obtain the funds to purchase a property.
If you want to contact my mortgage broker and find out your borrowing capacity just go to onproperty.com.au/mortgage and put in your name and phone number and he’ll give you a call.
The banks look at this a lot especially if you have a deposit less than 20% because they want to see that you can actually save money. The better history you have of saving money can indicate that you’re more likely to pay off a mortgage.
Every bank looks at this factor differently. Some just look at the amount of money you’ve held in your bank account for over 3 months and others look at consistent growth in your savings.
Lenders Mortgage Insurance.
If you’re going to save a 5% deposit then you’re probably going to need to pay Lenders Mortgage Insurance. In many cases you can add it to the loan but it’s also possible that you will need to pay for it. It’s important to consider whether you want to have Lenders Mortgage Insurance or save a larger deposit and avoid it.
In episode 200 I talked in more detail about whether you should save a big or a small deposit.
Stamp Duty and Your Cost
It’s easy to assume that you are going to buy a $500,000.00 house and save a 20% deposit. That amounts to a straightforward target of $100,000.00.
But you also need to take into account stamp duty and other costs which can be roughly 6% of the purchase price of your property.
So pretend you want to buy a $200,000.00 property and save a 5% deposit. That means that you need to save $10,000.00 but you would also add another 5% to 6% on top of the price for stamp duty and other costs. Overall you would be looking at another $10,000.00 to $12,000.00 on top of the original price.
Now on to the steps of how to save a deposit in a year.
Step #1: Find out your borrowing capacity
Like I just discussed in the considerations you need to find out your borrowing capacity.
Once you contact a mortgage broker you can find out your borrowing capacity and set realistic goals. Again if you want my mortgage broker to call you go to onproperty.com.au/mortgage.
You can use online calculators but they have a tendency to be inaccurate. Additionally they are not a guarantee of how much the bank will actually lend you. However by talking to a mortgage broker about your borrowing capacity you can also get pre-approved which can help you in the future.
Step #2: Choose your purchase price
Once you know what you can borrow choose the purchase price of the property.
This might vary depending on the area you’re going to invest in. Choose your purchase price based on either the area that you’re living in or where you want to invest.
Step #3: Work out your savings target
Start by looking at a percentage of the deposit that you’re going to save and work that out from the purchase price. For example a 20% deposit on a $500,000.00 property would be $100,000.00.
Then you need to add additional costs like stamp duty. You could use Google and search ‘stamp duty calculators’ if you want an accurate representation of how much stamp duty you’re going to need to pay. Or you can add an estimated amount of around 6% to your purchase price.
Step #4: Break down your savings target
Pretend that you are going to save a 20% deposit for a $500,000.00 property which would be $100,000.00 (for this example just ignore stamp duty and other costs but just remember that you would add it on). If I divide that by 12 then that gives me a monthly savings target of $8,333.00. If I were to divide it by 52 then that would give me a weekly target of $1,923.00. And the daily target would be $274.00 if I divide the price by 365.
Honestly saving $100,000.00 in one year is going to be very unrealistic for most people. But maybe someone is considering a $200,000.00 house with a 5% deposit. Now the savings would be around $10,000.00. With that target amount the person’s monthly, weekly and daily savings targets would be a little over $800.00, $190.00 and $27.00 respectively.
Basically work out your savings target and break it down into monthly, weekly or daily amounts.
Step #5: Potentially lower your purchase price
This step might mean looking out of the area that you really want to buy in and at other potential investments in areas that aren’t as expensive.
Step #6: Repeat steps 3 and 4
At this point you would go back with a cheaper purchase price and work out your savings target again while considering if the savings target is achievable for you. You want to make sure that you have an achievable target you can save towards.
Step #7: Pay yourself first
Once you have your savings target it’s important to pay towards that first instead of just taking what money is left over from your usual lifestyle. So put your savings away first and then work out a way to live off the rest which leads into the next step. . .
Step # 8: Learn to live off of the rest
Try to live off of what money you have left after you pay towards your savings target. Likewise you could attempt to increase your income so that you can afford to live off of the money you have left over.
Step #9: Rent
It is a fact that paying rent can count towards your deposit or proven savings. But you will need to have at least 12 months of rent payment and pay it on time every time. Don’t miss a rent payment at all.
Many banks now can actually count your rent payments as your proven savings in some cases or it can count towards your deposit even though you’re not giving them any money. This is because they see you as less risky and therefore the bank might be able to waive the Lenders Mortgage Insurance.
I haven’t given any precise tips on how to save money but that’s because I’ve already done a blog post on it.
So saving a deposit is not easy and can take time. If you can do it in a year then that’s fantastic! But even if it takes you longer than a year to save the funds don’t give up because it’s going to change your financial life and provide you with more security and financial freedom if you invest correctly (disclaimer: I cannot guarantee that you’re going to get rich or financially free).
Until tomorrow remember that your long term success is only achieved one day at a time.