RECORD-LOW interest rates make it an ideal time to get your foot on the property ladder. And that’s a good reason to get serious about saving for a deposit.
There are two ways to accrue a deposit faster: Save more or spend less. The trouble is, that’s not an easy task for first-home buyers in the current seller’s market. Take Sydney as an example. Buying an existing home at RP Data’s median dwelling price of $650,000 will cost you around $25,000 in stamp duty alone; that’s before the deposit and loan repayments.
With a 10 per cent deposit, you’ll need at least $90,000 in the bank just to get in the game, then $3,066 a month to cover the repayments at a one-year fixed interest rate of 4.79 per cent. And don’t forget the extra $100 a month if you’re capitalising lenders mortgage insurance (LMI) into the loan.
That’s a decent sum in anyone’s book, so if you’re serious about buying, having a savvy savings plan will improve your chances.
Commit to big savings
For most people, buying their first property means committing to big savings and cutting back on lifestyle expenses.
While starting small and skipping the morning coffee every day is a good start, it only banks around a thousand bucks a year, which hardly puts a dent in a deposit. Plus you won’t be that nice to be around by 11am.
Set a Budget to identify the big spending areas where you can cut costs or pay down debts quicker. As part of your Budget, always pay savings and debt first and yourself second.
High-interest savings accounts aren’t paying particularly attractive rates these days, so investors chasing a decent return will have to look elsewhere.
If you’ve got a few years before looking to buy, you could consider starting a share portfolio with the seed money for your house deposit. There’s the potential for capital growth as well as dividend income, which could really grow your wealth.
If you’re not comfortable investing then speak to a financial adviser.
Focus on your career
One of the easiest ways to achieve your goal of home ownership is to knuckle down and start building a career (read: earn more).
Doing well in your job usually equates to a higher salary, which if you’re smart about things can lead to quicker savings and more borrowing potential. When you get a pay rise, a good option is to stash away the difference between the new salary and the old one.
Chances are you’ve been getting by just fine on your old salary so the extra cash is a good opportunity to super charge your savings.
Think long term
Everyone would love their first place to be perfect, but don’t despair if that modern townhouse in a blue-chip suburb is a bit out of reach right now.
The property market is a long-term game and each home you own can be a building block to something bigger and better. So don’t be afraid to look at suburbs you wouldn’t consider as a first choice, or, if you don’t want to compromise there’s always the option to rent where you want to live and save to buy a more affordable investment property elsewhere.
Don’t get carried away
Record low interest rates mean that right now it’s cheaper than ever to borrow money for a house; some providers are even offering mortgage rates of less than 4 per cent.
But cheap cash, combined with historical capital growth and generous tax breaks for investors, is only serving to prop up demand for property and increase competition and prices. In this market, it’s easy to get tempted to borrow more than you should to secure the place of your dreams.
Just remember the honeymoon period of low rates won’t last forever, so it’s a good idea to factor in how you would cover the repayments if rates go up at least 2 or 3 per cent.