We have this thing called “The Great Australian Dream,” which is basically to own a house on a quarter acre block. This dream has its roots in returning servicemen wanting to live the good life they fought to defend. It was part creating a comfy family nest, part preventing the land going to “undesirables”, and part an asset to draw on it hard times. And for this, you’d save a house deposit, and take out a mortgage for the rest.
Vision, Mission, Virtues
Seventy years on, our lives have changed a great deal. Quarter acres are expensive and hard to come by. And in any case, not many are willing to make the time and effort required to maintain one. But most people still hope to buy a home of some description of their own.
There are a lot of reasons you might want to buy property, and as everything else feels so insecure, we’re going to see
A secure future in a home of our own. (Where the sun always shines on the green grass and we’re always happy.)
In the meantime, we’ll create
Saving is always harder than spending, so Focus, Reliability, and Discipline.
There are two ways to save your house deposit
- Save what you think you can afford.
- Work out how much you need, then using a SMART goal (e.g., $X per pay for Y years) to get there.
Basic Spending Plan
We’ll start with the same basic proportional plan with the after-tax monthly income of $3,435.
% of Income
The common wisdom is to start by working out how much you can borrow. It’s a reasonable enough place to start, but at that point, most people tend to decide that’s how much they’re going to spend and shop accordingly.
But your home is likely the most significant purchase you will ever make and you are committing decades to servicing the debt.
Why not decide what kind of house you’d like, find out what it might cost and then decide whether you can afford it. Compare smaller properties, that need renovation or are in less expensive areas. Consider whether it’s worth paying more to live closer to public transport, or less to live in a new subdivision with fewer facilities.
How Much Do You Need to Save?
For the sake of convenience, my sample wage could be eligible for a $405,000 loan. And depending on how fussy you are, you could buy a three bedroom, 1 bathroom house from $300,000. Let’s say you’re looking for a $400,000 home.
You’ll need a minimum deposit of 5% ($20,000 deposit, repayments over 30 years @ 5% $1,020/mnth), though a deposit this small may cost you a higher interest rate, will cost mortgage insurance and could reduce your chances of getting a mortgage. Total cost (including deposit) $59,200.
Your chances of getting a mortgage are better with a bigger deposit, and at 20% ($80,000, repayments @ 5% over 30 years $859/mnth ), you don’t have to pay mortgage insurance. Total cost (including deposit) $105,216.
Let’s aim high and say $105,000 as a house deposit.
Which leaves us with a range of possible savings targets:
Let’s work with $1,094/month over eight years. Though if you’ve been renting, your lender will take that commitment into account.
How Much Can You Save?
Another thing that people tend to do when saving for a house deposit, is ruthlessly cut expenses. Which again is fine, but:
- You eliminate your capacity to deal with the unexpected,
- You live a poor and miserable existence while you’re saving, and
- Borrow money based on the financial assumption you’ll be living the same poor and miserable existence for the term of the loan.
It’s understandable because modern spending is often subscriptions direct debited to your accounts, and you’ll probably face some moral questioning about whether your $15/month Netflix (etc.) subscription is necessary. But;
- It’s cheaper than going to the pictures, and
- You’ll appreciate it when your mortgage repayments are so large you can’t afford to go to the pictures.
Work Out How Much You Can Pay
Take a look at your expenses, and weigh them up against your Vision, virtues and goals. Where can you sustainably reduce your costs over the long-term?
- Food: If you’ve been living a normal life, you’ve probably been eating take out. You could be radical and cust this by $200/month, but let’s cut the snack food, and allow the odd night off and cut by $199/month.
- Housing: With an eight-year time-frame it might be worth relocating to cut costs – how about testing a potential new suburb?
- Clothing: In all likelihood, you have more clothes than you wear. Try to mix it up a bit and cut $215/month.
- Operations: Look at cuts to things like your phone plan or changing utility providers. Let’s try for another $130.
- Happy Life: This is technically already savings – it pays for Netflix, the gym, and so on. As I mentioned, we’re still talking sustainable, so it’s going to be things like vacations, education and gifts. Let’s take $550.
Which gives you $1,094 a month over eight years.
Work Out How to Save
When you have a savings target like this that’s going to take several years to achieve, you should do some thinking about how you can make your savings work harder, potentially reducing the amount of time you have to save for.
And when it comes to getting a mortgage, your lender looks at the frequency as well as the amount of your savings, so start with a scheduled deposit;
And after a few months, when you’ve got a few thousand, start looking for higher interest rates.
Potential House Deposit Holistic Spending Plan
There’s quite a significant change in expenditure which is bound to be quite shocking initially and may need some working up to.
% of Income
This is one possible way to save a house deposit. You will, of course, adjust the figures according to what else is going on in your life. And how much support you are offered and willing to take from those around you.