It’s a hurdle that many Australians face: how to save for a deposit while renting. It may seem out of reach, but it’s possible. Here’s our advice on how you can meet your rental payments and set aside surplus cash for a home loan deposit.
As rent and utility bills roll in like clockwork, saving for a home loan deposit may seem unattainable, but there are ways that you can avoid dipping into your savings unnecessarily.
If you plan to complete a 20% deposit, you’ll most likely need to save tens of thousands of dollars while still keeping up with your daily expenses (if you want to dodge paying lenders mortgage insurance, or LMI). However, every inch of savings will help you get closer to your homeownership goal, and persistence certainly pays off.
There are various quick fixes to increasing your savings, such as selling assets or unwanted items, or even having a go at house-sitting, but saving for a home loan deposit requires continued effort and a long-term mindset.
Here’s some advice about how you can build up your deposit more efficiently so you can get into the property market sooner.
Nikki rents in Earlwood while saving for home deposit
Nikki is a 26-year-old professional who rents in Sydney and is saving for a 20% home loan deposit.
Although Nikki knew it would be difficult to save for a deposit while renting, she made sure she found a place where she could truly afford to rent. After doing some research, she found a rental property in Earlwood – just outside Marrickville and Newtown – where the rent was slightly cheaper.
With a minimum monthly deposit of $300 into a high interest savings account, Nikki worked out that she would have saved up a total of $3,600 (plus interest) in the first year. Nikki makes a conscious effort to transfer her salary into her high interest savings account as soon as it’s deposited into her regular savings account.
When setting herself a budget, Nikki factored in the basic necessities, including rent, petrol, phone and food expenses. She gave herself a small spending allowance and ensured that the rest would go towards her savings. She planned ahead for special occasions, such as birthdays, where she would allow herself a bit more money to spend.
Nikki also cooked her own meals at home as often as possible, and she took on extra freelance photography work for local businesses on the weekend. She found that the extra $300-$400 a month went a long way in helping her achieve her savings goal.
Create a budget strategy
Step back and take the time to understand your finances and spending habits. Request a copy of your credit file so you can review any debts that you have listed against your name. This may help you work out whether there is room to consolidate or eliminate any debts, such as credit cards or personal loans.
You then need to identify your living expenses such as utility bills, transport and food to see whether you can minimise any of these costs. For instance, if you’ve been spending $80 on petrol every week, think about taking public transport or cycling to work. (It’s better for the environment too.)
Next, you need to think about unnecessary expenses that you could forego such as coffee, gym memberships or alcohol. This is where you can potentially save a lot of money. Instead of buying a daily coffee, have one at home, and make your own meals more often.
From here, you should work out your budget plan. Work closely with an accountant so you can understand how much you can set aside each month to go towards your deposit.
Budgeting apps for your wearable technology can help you monitor where your money is going.
As a general guide (and depending on your lifestyle needs), you should allocate around 50% of your income on living expenses (such as rent, transport, insurance and utilities), 25% of your income on entertainment (such as dining out, movies and concerts) and roughly 25% should go towards your savings. Around 15% of the amount you’re saving should go directly towards your deposit fund.
Trim expenses (again)
Find more ways to trim your debt; this should be a continuous habit. If you’re still a member of an expensive gym, it might be time to move to a smaller gym. If you’re paying $85 per month on a phone plan, consider downgrading to a cheaper plan.
1. Minimise rent
Find ways to lower your monthly rent. Find a roommate, move to a more affordable location or consider downsizing to a smaller or older place. For example, if you’re currently paying $300 per week in an inner-city location, consider moving to an outer suburb location where you might pay just $200 per week.
A $100 weekly saving may not seem like much, but this could add over $5,000 to your savings account each year, which could fast-track your way into the real estate market.
Alternatively, consider negotiating your rent with your landlord. If you’ve been a reliable and long-term tenant, your landlord may want to hold on to you, as this would save them the hassle and cost of advertising for a new tenant.
2. Don’t be complacent
You can also try negotiating with your utility and service providers. Approach your electricity, gas and internet providers and ask for a better deal. You may be surprised to find out just how much providers want to retain loyal customers.
3. Be efficient
Another way to lower your expenses is to be conscious about your energy use. Turn off the air conditioner or heater when you’re not in the room, and switch to energy-efficient lighting to lower your monthly utility bills.
Work out a savings target
Once you’ve finalised your budget plan and worked out how you can lower your ongoing expenses, the next step is to determine how much you need to save for a deposit. Depending on your timeframe and how much you’ve already saved up, most homeowners-to-be try to save up 20% of the property purchase price to avoid paying an insurance premium (for a full documentation home loan).
For instance, if you wanted to purchase a $750,000 property, you’d need to come up with $150,000 to complete the required deposit. Speak to an accountant and mortgage broker during this stage so they can help you understand your borrowing power, which can dictate your savings goal.
Be proactive (and creative) about making extra cash
There are several ways that you can boost your household income without taking a second job. For example, you could rent out a spare bedroom or do a little house-sitting.
Use your skills outside of your workplace to get some extra cash. If you’re an accountant, volunteer to help people lodge their tax returns. If you’re a graphic designer, consider doing some freelance projects on the side.
Dedicated savings account
Open a high interest account that is dedicated to your deposit savings. You can separate your deposit funds from your other accounts and keep track of how much interest you're earning each month. When it comes to applying for a home loan, making regular deposits into a high interest savings account will demonstrate to the lender that you have good financial discipline.
Co-borrower or guarantor
If you can invest in property with a close family member or friend, saving for a deposit becomes much easier, as the amount you need is halved. However, there are other factors to consider before you purchase property with someone else, so make sure you do your homework.
Finding a guarantor for a home loan is another way to relieve some of the pressure of saving up for a home, which can also help you get into the property market sooner.
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