How to save for a home loan deposit while renting
Saving for a good-sized deposit is never easy and if you’re paying rent at the same time, it can seem almost impossible. However, with some careful planning and a few short-term sacrifices, you can save a lot more than you think!
There are five key questions you need to ask yourself once you decide to save hard for a deposit. Answering them honestly will help you strategise realistically and make the end goal of owning your own home a reality.
Question 1: How much do you need to save?
Understanding how much of a deposit you need will help you set realistic goals as you save.
Research the sort of property you’d like in the area where you want to buy. Once you get a rough idea of how much you will need to spend all up, you can work out how much of a deposit you need.
A deposit of 20% of the purchase price is considered normal, although some lenders offer low deposit mortgages to people who have less of a deposit on the proviso that they pay Lenders Mortgage Insurance (LMI) to cover the bank’s risk.
In some cases, you may be eligible for the NSW Government’s Home Guarantee Scheme or other incentives, which would allow you to secure a loan with a reduced deposit.
Speaking to a financial expert or mortgage broker will help you understand how much you may be able to borrow, which in turn will help you determine your deposit-saving goal.
Question 2: How much do you earn?
While many people have a fixed income and know exactly how much they will earn from month to month, others, such as freelancers and seasonal workers, may find it more difficult to estimate their annual earnings.
If that is your case, have a look at what you have earned over the past year or two and average out a weekly or monthly minimum income that you can realistically maintain for at least two years.
If you fall behind that minimum, you might need to consider finding extra work for a short time while you save towards your goal.
If you are on a fixed salary, take note of your take-home pay rate and set yourself a monthly savings amount that suits your lifestyle and savings requirements.
Question 3: How much do you spend?
You are no doubt aware of exactly how much you spend on things like rent, insurance, gym memberships and other large fixed costs. But do you know exactly how much you spend on coffee or energy bills over the course of a year?
Tracking your spending assiduously for an extended period will provide you with some very interesting information and probably a few surprises too.
Go through your bank statements for the past year and categorise your spending into essential and non-essential expenses. This will set you up for the next, most important step.
Question 4: How can you reduce your expenses?
This is a big one. Saving for a home deposit means working hard and making short-term sacrifices to reach your goals. If you’ve successfully mapped your earning and spending habits, you will be able to identify the areas where you can realistically cut back spending, putting the money you save towards your deposit.
Here are some tips to help you do that:
- Rent is a major expense, and it may be worth trying to reduce how much you pay by moving to a cheaper area, negotiating with your landlord, or looking for a flatmate. It won’t be forever, and the savings can make a huge difference to how quickly you reach your home deposit goals.
- Shop around regularly for better deals on utilities, including electricity, gas, phone, and internet. Be aware of your energy usage and remember to switch things off when you are not using them.
- Curb your coffee enthusiasm. Or at least buy a percolator and make your own morning brew for a fraction of the cost of a café coffee. The same goes for eating and drinking out. Start to create a habit of enjoying social time at home, where you will be able to save significant amounts of money.
- Decide if you really need a gym membership, six streaming services, and other non-essential expenses. Quite often, we accumulate monthly outgoings that we don’t use often enough to justify the expense. There are lots of free alternatives - do some research and streamline as much as possible
It can be hard to cut costs but remember that short-term sacrifices will get you into your own home sooner. You can talk to a financial advisor for expert advice on how to manage your income and boost your savings.
Question 5: How can you make savings work harder?
Once you’ve started building your nest egg, you need to ensure that your savings are working hard for you. There are several strategies to consider.
Open an account that is only for your home deposit savings. Set up a direct debit from your everyday account for a minimum weekly or monthly save, then add any extra leftover cash at the end of each month to the growing sum.
Many banks give you the option to round up payments made with your debit card, putting the extra few cents into a nominated account. It’s surprising how quickly these little amounts can add up.
We’ve all heard how terrible the current cycle of interest rate hikes has been for those who already have a mortgage, but for savers, it’s been a boon after years of near-zero income on your capital. Shop around for the best savings accounts or term deposits to help your money grow faster.
A few final words
Building good savings habits while you are working towards securing a home deposit will stand you in good stead for years to come, and the small sacrifices will reward you many times over when you finally hold the keys to your home in your hand.
Other buying, selling and investing articles and resources
Guide to property investment success in NSW
Selling a house or apartment in NSW eBook
Buying a house or apartment in NSW eBook
