Life event: Helpful tips to save for a home deposit

The national averages# for the time it takes an average-income couple* to save a 20% home deposit ($111,080) on a median priced house ($555,402) is 4.6 years. In contrast, it takes 4.2 years to save a 20% home deposit for a median priced apartment.

*An average combined salary of $116,789, and setting aside 20% of their combined pre-tax income annually into a high-interest savings account.

Importantly, whilst the national averages are in some respects a helpful gauge of the housing market, they don’t highlight several things. For example:

1. The disparities that can arise between states/territories. For example, when considering houses, the 20% home deposit required and the time taken to save it:

• Australian Capital Territory (ACT) = $130,896 and 4.6 years.
• New South Wales (NSW) = $148,281 and 6.0 years.
• Northern Territory (NT) = $109,433 and 4.2 years.
• Queensland (QLD) = $92,240 and 4.0 years.
• South Australia (SA) = $80,985 and 3.8 years.
• Tasmania (TAS) = $61,352 and 3.1 years.
• Victoria (VIC) = $126,187 and 5.4 years.
• Western Australia (WA) = $94,651 and 3.6 years.

2. The disparities that can arise between suburbs/regions. For example, when considering houses in NSW, the 20% home deposit required and the time taken to save it:

• NSW = $148,281 and 6.0 years, but
  • Mosman (Sydney) = $795,408 and 21.2 years.
  • Randwick (Sydney) = $426,550 and 13.8 years.
  • Bland Shire (Central West) = $40,793 and 1.8 years.
  • Bogan Shire (North Western) = $29,680 and 1.2 years.

Not to mention, the implications of an average-income single saving a 20% home deposit.

All that being said, broadly speaking, given the current climate (e.g. housing prices, wage growth and living costs), one of the biggest hurdles that remains, for first homebuyers especially, is saving an adequate home deposit (e.g. avoiding Lenders Mortgage Insurance or a loan guarantor arrangement).

With this in mind, we offer some helpful tips. Admittedly, they are predominantly directed at first homebuyers; however, those looking to purchase an investment property or their next home may find some of them useful as well.

Understanding your borrowing power

If you are starting your home deposit saving journey from scratch, probably one of the first ports of call is to get a handle on your potential borrowing power, namely, how much you can afford to borrow from a financial institution (e.g. bank, credit union, or building society) when taking into account the following:

1. Your application type (single or joint);
2. Your number of dependants;
3. Your income, current loans and expenses;
4. Your loan (interest rate and loan term).

Importantly, if you receive a:

1. Lower than expected assessment of your borrowing power, don’t feel stressed as this has occurred for a reason – to make sure you don’t overleverage yourself and experience financial stress. Take a closer look at the factors that influenced this result. Is there anything you can improve upon?
2. Higher than expected assessment of your borrowing power, don’t feel pressured into borrowing to your limit. If you find a property that ticks all your boxes (e.g. location, building features, and price) and it’s lower than your advised borrowing power amount, then that‘s ok.

This brings us to our next point.

Doing your housing market research

Property is generally regarded as a long-term investment due to the purchasing and selling costs, relative illiquid nature, and potential price volatility in the short-term. Consequently, it’s important to be clear on what your needs may be not only for the short-term, but also for the medium to long-term (e.g. will it give you room to grow if there is a new addition to the household).

With this in mind, it’s time to do your housing market research – jumping online to view listings, visiting open houses and enlisting the help of a professional may prove beneficial in this regard. Importantly, in conjunction with the abovementioned considerations, keep in mind two questions, which depending on your personal circumstances may or may not be in harmony with another:

1. Where would you like to live?
2. Where can you afford to live?

Once you have short-listed a few properties that tick all of your boxes, the next step is working out the adequate deposit that you need to save to purchase a home. Maybe consider taking an average of the asking prices for the properties that you have shortlisted.

Importantly, an adequate deposit can typically represent a Loan to Value Ratio (LVR) of ≤80%. The rationale behind the ≥20% deposit is that not only does it give you greater equity in your home and a reduction in your mortgage commitments, but it can also help you to avoid Lenders Mortgage Insurance or a loan guarantor arrangement. 

At this point, it may also be worthwhile conducting an investigation into whether you qualify for any grants (e.g. the First Home Owner Grant scheme) and/or stamp duty exemptions and discounts.

Assessing your personal finances

Now that you have a handle on the current housing market and what an adequate deposit may look like, it’s time to take a look at your personal finances and how they interact with your ability to save. For example, consider the following:

1. Accommodation in the interim. Housing costs can often take up a large percentage of your weekly take-home pay. With this in mind, if you are renting, think about what you really need whilst you save. Simply put, the more you want (and pay for) now and over the next few years, the less surplus income you will have to put towards saving.
2. Spending habits in the interim. Sorting out your housing costs (if applicable) can be a great start to finding surplus income; however, extending this same approach to all of your spending habits can often provide further beneficial results. As such, it’s important to not only live within your means, but also know the difference between necessities and luxuries – simple ‘excesses’ can add up.
3. Debts in the interim. Debt (e.g. credit cards, personal loans and car loans) can impact not only your borrowing power, but also your ability to save for a home deposit. Given this, consider paying down debt (and, limiting further debt accumulation), so you can concentrate on saving.

Putting your savings to work

With the above in mind, what’s your surplus income at the end of each payment cycle, namely, how much can you afford to save? Once you have figured this out, it’s now time to consider your options in terms of where to put your surplus income? For example, depending on your personal circumstances (e.g. financial situation, goals and objectives), this may involve utilising one (or more) of the following:

1. A high-interest savings account.
2. A diversified investment account.
3. The First Home Super Saver Scheme.

Please note: The Federal Government abolished first home saver accounts effective 1 July 2015.

Importantly, when it comes to making a decision as to where to put your surplus income, several things need to be carefully considered. For example, fees, diversification, inflation, asset allocation, risk versus return, liquidity, compound interest, dollar cost averaging and taxation.

Final points

1. The ≥20% deposit will help with the purchase of your home, but remember you also need to cover the acquisition costs, such as the conveyancing fees and any applicable stamp duty.
2. The housing market will move over time, which may mean that the ≥20% deposit will also need to be adjusted accordingly; however, the more you can save, the less you will need to borrow (with interest) when it finally comes time for you to purchase your home.

 If you have any queries about this article, then please contact us.

#Bankwest. (2017). Bankwest First Time Buyer Report.