Home deposit saving secrets

Buying a home is one of the biggest financial commitments most people will make in their lives. Many renters decide to buy their own homes after becoming disgruntled with paying off someone else's mortgage.

With most banks now requiring a deposit of at least 10 per cent of the purchase price of a property, the idea of saving anywhere between $25,000 and $40,000 just to enter the property market may look a little daunting.

But with some clear strategies the goal may actually be achievable within five years.

The best place to start is to decide how much you want to save and choose an account to put it in.

Since most people are put off by the thought of preparing a budget, you can actually start saving without preparing one  though it is something you should return to, to get some clear ideas of where to save.

Pick an amount of money to set aside each pay day. It doesn't matter how small you start. The aim is to get into the habit of saving.

Asking your employer to put this money automatically into a savings account each pay, or setting up your own system to put money into a separate account, takes the work out of saving as you won't have to remember to put the money away.

When you get used to saving a small amount regularly, you can look at your expenses to see if you can afford to save more. A budget can help you do this.

There are plenty of online savings calculators that can help you work out how much you need to save each month to achieve a certain goal.

According to understandingmoney.com.au, to reach a goal of saving $25,000 in five years you will need to save $358.66 a month. If you start off with $1000 in an account paying 4 per cent interest a year, after five years you will have made $21,519.79 in regular payments plus a total of $2480.21 in interest.

HOW MUCH DO YOU NEED?

The global financial crisis has had a marked impact on what financial institutions are prepared to lend and to whom.

The founder of online home loan auction company ziggybid.com.au, Glen Spratt, says the 100 per cent loan to value ratio (LVR) or no deposit home loans are a thing of the past and that all lenders want borrowers to have demonstrated they have saved a deposit before they will approve their home loan.

In most cases a minimum of 5 per cent of the purchase price needs to be saved. This is known as genuine savings, Spratt says.

He says banks are also unlikely to approve a loan where the deposit has been gifted from a parent unless the LVR is much lower.

Most lenders are only really interested if you have a 10 per cent deposit at that moment and in the case of the CBA they will consider a slightly higher LVR where they have an existing credit facility with that lender, he says.

A financial planner with Strategy First Financial Planning, Patrick Anwandter, says a young person wanting to eventually buy a home should build up as big a deposit as possible. One advantage is it avoids mortgage insurance but it also means lower repayments.

Work out the type of house you want to buy," Anwandter says. "Invest the difference between the rent you are paying and what you would have to pay on a mortgage. The aggressive investor may want to use the difference in cashflow to fund a regular gearing plan or interest on an investment loan (as long as their timeframe before buying a home is more than five to seven years).

"When it comes time to buy the home, they can look at selling the investments and using the equity accumulated to fund the deposit. If the investment hasn't turned a profit, they can continue with the investment until it does.

Condition yourself to save the repayments and build up equity. When the time comes you will have a savings history as well as a deposit to help fund the purchase.

SOME ADVICE

Anwandter's advice to older clients who may be renting due to circumstances such as a divorce settlement but want to buy a property, is to look at using their superannuation to build up capital in a tax-favourable environment, which they can then draw on in retirement to fund a property.

Under current super laws, a retiree over 60 can draw a lump sum out of superannuation tax free, with the proceeds available to fund the purchase of a home. Coupled with the ability to salary sacrifice pre-tax income into a concessionally taxed environment, it is a way to accumulate the purchase price quickly.

Other interesting options may apply to those with a self-managed superannuation fund, with the opportunity to borrow within the fund to buy a home in which they want to live in the future.

Upon retirement (after age 60, preferably), they can pay the house out of the fund as a tax-free benefit (stamp duty would be payable).

This is based on current laws and people should be mindful that tax on end benefits may be reintroduced for those over 60," Anwandter says.

"Furthermore, such a strategy needs to be very carefully managed to ensure the fund complies with super and tax laws at all times. For example, under no circumstances should the members or their relatives live in the house whilst it is owned by the fund, even if they pay market rates of rent.

DON'T FORGET THE EXTRA COSTS

UNFORTUNATELY, the cost of a property doesn't end with the deposit. There are a number of upfront and associated costs, which you will need to factor into your financial readiness.

They include: property pest/building inspections, which can cost several hundred dollars upfront but may save thousands down the track conveyancing/solicitor fees for the legal work involved in purchasing real estate a loan application fee, which is generally about $600 and will, in most cases, include the first valuation by the chosen lender a property transfer fee, which is a state government charge to register the transfer of property title from one person to another property transfer stamp duty, which is a tax levied upon the sale/purchase of property to cover the cost of the legal documents a mortgage registration fee imposed by the Land Titles Office (or equivalent) in each state or territory for registering the lender's mortgage on the title record for the property involved lenders mortgage insurance (LMI), which insures the lender against any loss incurred if the borrower defaults and net proceeds of an enforced sale of the security property are insufficient to clear the debt building insurance, which is often a condition of loan settlement and council rates, which will be based on the property's value.

TOP TIPS TO MAKE MOST OF YOUR SAVINGS

1. PUTTING CENTS TO GOOD USE

Work out a property purchase plan and timeline. First, go through your incomings and outgoings and establish a budget. Second, set yourself limitations and realistic expectations of what you want to achieve, then adjust your savings plan to suit. Finally, consider any sacrifices you could make to boost your finances. You may find if you knuckle down now, you are able to afford luxuries when you are closer to the finish line.

2.RENT OUT A SPARE ROOM OR GARAGE SPACE

Why not ask someone else to move into your spare room or unused space and help to pay half your rent? This means you will be able to save half of your weekly expenses (or more if you're clever).

3. MAKE IT, DON'T FAKE IT

There are simple ways to save money week to week. One idea is to bring your lunch to work. Takeaway food is expensive purchasing your lunch each day usually costs more than $30 a week. Other cost-cutting ideas include contacting your pay TV service provider to see if you can reduce your package to eliminate unwatched channels. Buying in bulk can also help you save and public transport systems offer discounts to passengers who prepay for their trip.

4. CHEAP TUESDAY

If you want to see the latest movies wait until Tuesdays, when ticket prices are reduced. You may also want to keep in mind that many restaurants have a weekend surcharge, so consider getting the gang together for a mid-week catch-up instead. Petrol is often cheaper on Tuesdays, too.

5. SPRING CLEAN

Consider cleaning out your closet or garage as a means to make extra money via a garage sale. Your outdated or unused handbags, accessories, sports equipment or tools could be someone's ideal find. For any unique items, list them on an online auction you might attract a collector or serious enthusiast who is willing to bid a high price to claim your junk.

CASE STUDY

AS A single person on "a reasonable but not huge wage" and living in Sydney, Kristy Sheppard, 31, did what many people aspire to saved enough to buy her first home in less than three years.

Sharing with a housemate and paying fairly low rent, the senior corporate affairs manager for Mortgage Choice was able to scrounge and save $60,000 of which $45,000 went towards her one-bedroom apartment in Cammeray.

Her first step at age 28 was to set up a couple of high-interest savings accounts. Depending on which account was paying the highest interest rate at the time, she would direct well over half of her salary, any bonus payments, dividends and tax returns there.

Thanks to monthly auto payments, I didn't have sight of any of the money going in and I developed a mindset that once it was in, it was not coming out, Kristy says.

Not having a credit card was another important part of her savings plan.

I knew how tempted I would get by having extra credit available and understood that having a credit card would be taken into account when a lender looked at my ability to service a home loan, she says.

Working in the mortgage industry, she admits to getting a lot of free advice.

I basically sacrificed and saved whatever I could but with a smile on my face because I knew what I was working towards," she says. "It is amazing what a difference it makes just not having that morning takeaway coffee or as many takeaway meals or going out as often.

While she stuck to her "old and rusty Hyundai Excel", she did manage an annual holiday, including a trip to Greece.

When it came time to enter the property market, Kristy had a list of things that were important some of which she had to compromise on.

It hasn't got undercover parking and it is closer to the freeway than I was hoping but it does have a balcony, faces north-east and no one looks into my place. I understood I wouldn't get my ideal property the first time around I just needed a foot on the ladder.

A first-home owner grant of $7000 helped to cover her purchase and moving costs, which ended up being more than she accounted for because of a broken foot.