How to start saving a house deposit this year

Could this be the year when you finally sign on the dotted line and become a home owner? To do that, you’ll need to save a deposit, which isn’t as easy as it sounds. But there are savings strategies to consider and support options available that may be able to help you make real progress towards your goal this year. 

Plan a budget for a small deposit

Most banks and mortgage lenders will ask for a home loan deposit of 20 per cent or more of the property value – an amount that you can’t easily scrounge up out of spare change from behind the sofa cushions.

But it is possible to successfully apply for a home loan with a deposit of just 5 per cent of the property value, which may be a much more manageable prospect when it comes to setting a savings goal.

However, the smaller your home loan deposit, the more you may have to pay for Lender’s Mortgage Insurance (LMI), which is required if your deposit is less than 20 per cent. LMI policies cover the lender, not the borrower, in case the borrower defaults on their mortgage repayments.

You may need to adjust your savings budget accordingly – you can calculate 5 per cent of a property’s value, plus the estimated cost of LMI, to work out the total amount you may need to save. Alternatively, you may be able to talk with your parents, grandparents, or other relatives about becoming a guarantor, which could help remove LMI from your list of expenses.

Keep in mind that there will likely also be other expenses to budget for when buying a property, such as fees and stamp duty (though many governments discount or waive stamp duty for first home buyers).

Try to grow your savings

Traditionally, one of the simplest ways to reliably save money and grow your wealth was to regularly pop your cash into a savings account or a term deposit to earn interest over time. However, in the recent low interest rate environment, it’s become hard to earn even 1% interest on your savings, sending many potential home buyers in search of alternative options.

Putting part of your money into other investments, from shares to crypto, could potentially allow you to make larger and faster returns. However, these investments are much riskier than savings accounts and term deposits, which are guaranteed by the government under the Financial Claims Scheme (FCS). Compare the available options and consider which choices may best suit your situation.

Consider using your super fund to save

While 10 per cent of your income automatically goes into your superannuation fund, you can also make extra voluntary contributions, either out of your take-home pay, or paid directly from your employer as part of your pre-tax income (aka a salary sacrifice).

Normally, any extra contributions you make to your super fund are locked away until you reach retirement age. But there are circumstances where you can access some of the money in your super fund to buy your first home, thanks to the First Home Super Saver (FHSS) scheme.

Under this program, you can make an early withdrawal of up to $15,000 per financial year (maximum $30,000 across all years) from your super fund to help pay for your first home. This money has to come from a salary sacrifice or other voluntary contributions – it can’t come out of your regular super balance. This helps to make sure you still have money available for when you retire.

Using your super fund to help you save up your first home deposit has the advantage that there’s no easy way to withdraw your extra contributions for spending, helping to ensure you stay on target for your savings goal. Of course, this can also be a drawback in the shorter term, as you could find yourself short of ready cash if you suddenly had to pay for an unexpected expense.

Keep in mind that many super funds invest the money you deposit, allowing you to further grow your balance. Depending on your super fund and its investment options, this could mean that using your super fund to help you save a house deposit could have the side benefit of securing a little extra money for a more comfortable retirement in the future

Keep records

You could make up part of, or even all of your home loan deposit using money from selling your car, your inheritance from granny, or liquidating your bitcoin. But when you apply for a home loan, the bank may not accept this money as a deposit.

Why? Because these aren’t “genuine savings” – in other words, you didn’t earn this money from your job and keep it saved. Some banks may insist that at least part of your home deposit is made up of Genuine Savings to help demonstrate that you’re a responsible borrower who knows how to manage your money.

You may be able to turn money from an inheritance or the sale of assets into Genuine Savings by keeping it in a savings account without spending it for a certain length of time, such as six months or longer. Different lenders may have different requirements.

Look for government assistance

You may not have to save up all of your home deposit by yourself. Government programs may be able to help build your savings balance, or reduce your other upfront costs.

Most of Australia’s state and territory governments offer some form of First Home Owners Grant (FHOG). If you fulfil the eligibility criteria, these grants may be able to significantly contribute to your deposit, reducing how much you may need to save.

Keep in mind that some lenders may not consider the FHOG to be Genuine Savings for the purpose of qualifying for a mortgage, so you may not always be able to rely too heavily on the FHOG for your deposit.

The First Home Loan Deposit Scheme (FHLDS) is a federal government initiative to help Australians buy their first homes more easily. Under this scheme, it’s possible to apply for a home loan with a deposit of just 5% (including your savings and the FHOG), and pay no LMI, as the federal government will effectively serve as your guarantor for the remaining 15% of the deposit.

However, it’s important to keep in mind that to qualify for the FHLDS, you’ll have to fulfil the eligibility criteria, including maximum property price caps. This could affect what property types you can purchase and which areas you can afford to buy in, which could affect your lifestyle as you’re also required to be an owner occupier. Also, only a limited number of mortgage lenders are participating in the FHLDS, so you may have fewer choices of home loan options. Finally, there are a limited number of places in the scheme each financial year.

Budget to save money regularly and don’t give up!

Even a small deposit on a property can be a lot of money, and the prospect of saving this sum can seem intimidating. Breaking down the numbers and creating a budget can not only help you set a concrete goal to aim for, but allows you to make steady incremental progress towards reaching that goal.

If you commit to a regular savings plan, even if it’s just a small amount each week, and stick to it, you will eventually reach your savings goals. Just keep in mind that the longer the time you spend saving, the higher the chances that your circumstances could change. For example, property prices could rise, effectively moving the goalposts for your savings project.

Adding it all up

In this hypothetical example, Alice and Bob are aiming to buy their first property with the help of the government’s FHLDS.

Because they’re buying in New South Wales, this means they’ll have a maximum price cap of $700,000 for established homes or $950,000 for newly built homes in Sydney and regional centres. But if they made a sea/tree change to a regional area, these change to $450,000 and $650,000.

Assuming they were looking at a $500,000 property, a 5 per cent deposit would be $25,000. To save this up in one year, they’d need to put aside $481 per week for 52 weeks.

They can also apply for the FHOG from the state government. In New South Wales, this would let them access up to $10,000 to go towards their deposit and other first home costs (even though they’re a couple, they can’t access the grant twice). This could mean they instead only need to save $289 per week for 52 weeks to save $15,000. 

They could also make a plan to save this money over a longer period of time (e.g. over two or three years), which would reduce the amount they’d have to take out of their household budget each week. However, this could mean risking seeing house prices increase in the areas they’re looking at, increasing their savings target.

One way Alice and Bob can save this money is to make extra contributions to their super funds, either through salary sacrifice from their employers or by making voluntary contributions themselves. This will keep the money sealed away in the super funds where it can’t be accessed until they’re ready to apply for the FHSS. If they selected a Growth investment option on their super fund, this could also help to more quickly increase the super fund’s balance for their eventual retirement.

There may be other costs for Alice and Bob to consider on their way to home ownership, but their savings plan can help them make steady progress towards their goal.

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