Some practical tips on saving for a home loan deposit
Some people view rent as ‘money down the drain’ whereas mortgage payments go towards something tangible – your own home. That’s not quite right as in each case there is a payment for the rental of the asset – in the case of the rent it’s the house in the case of the mortgage it’s the money.
But owning a house generates a number of advantages. Firstly you capture for yourself – rather than your landlord – the rising value of the house. House prices have been rising strongly for some time, which means they probably won’t rise as fast in the next few years. But even if they rise at 1 or 2 percent per annum, over time that generates huge benefits. Secondly unlike virtually any other investment, capital gains on your house are tax free.
You may have seen advertisements for low deposit loans. When lenders lend above 80% of the value of your home they almost invariably purchase ‘lenders’ mortgage insurance’ – which they then require you to pay. This insures them (not you!) in the case of your falling into difficulties and default. Mortgage insurers are a pretty inflexible lot. Most won’t provide insurance above 95% of the value of the property there are some insure loans of up to 97% but this is basically 95% plus the LMI premium.
But in each case it’s hard to get approval if you cannot demonstrate some savings – usually you have to have saved 5% of the value of the property – though there are some exceptions. And the most competitive loans are usually unavailable at LVRs of over 95% – and sometimes 90%.
Also, if you’ve made the decision to save for a deposit, it’s very important how you do so. Oddly, banks will often fail to accept the repayment of an existing debt as savings – though that’s what an economist would call savings and it sure feels the same! Savings in non-market assets are no good either. This goes for savings under the bed, savings invested in cars or consumer goods. Lenders see that as spending, not saving. Even if you could sell that vintage bottle of wine for more than you bought it!
Now, how can you maximise the amount you save? Credit cards are a major issue so reduce the amount of credit cards you use. Credit cards can easily distract you from a savings plan. Failing that getting rid of the dreaded card.
Find something to give up! If you smoke cut down or give up. If you go out twice a week, go out once a week. Plan to save small amounts of money on a regular basis. Draw up a budget setting out your income and expenses.
Overall no matter what bank account you choose or whether or not you decide to invest in higher returning assets it is essential that you devise a good savings plan and stick to it. This will make saving a lot easier and faster. You’ll have your deposit with a lot less stress. Then you can usually relax a bit knowing that the mortgage payments will impose a savings discipline on you even if you don’t build up a lot more money in the bank, or the home loan.
Small amounts of regular savings can lead to an impressive total over time and will demonstrate your consistent saving to a lender.
You also need to find the right vehicle in which to put your savings. Generally the banks will tell you that you need to choose between transaction accounts – with low interest but low transaction fees and savings accounts with higher interest but higher transaction fees. Indeed a number of financial journalists say the same thing.
But there are some tricks. If you’re prepared to use Bpay and other internet based technologies for payments, you can get accounts with low or zero fees but high interest rates. (Also, if you don’t have a cheque book you can avoid banking taxes.)
Access to your money is always a bonus if you are house hunting. However, if you are likely to be tempted to spend the money you’ve saved, you might want to tie it up. Various savings accounts provide penalties for early withdrawal as do term deposits.
Another option, which is routinely ignored for the purposes of saving for a deposit is share investment. Share investment generates higher returns on average than most other normal investments, but it also is more volatile and comes with higher costs of establishment – brokerage etc. This means that you can lose some of your capital if you are unwise or unlucky. However lenders will consider shares held for six months to be genuine savings.
So the share option is not for everyone. But if you are young and you don’t mind if things go against you, or waiting a little to buy your house as your shares recover then you might like to pile your savings into a unit trust. If the fund goes well, you save more money. The upside is that in most occasions this will help you achieve your deposit sooner, so long as you understand that if you’re unlucky it could take longer!
Also, especially if it is relatively short term, make sure you use a discount investment broker who will not charge you for entering the investment. You usually need a thousand, or often several thousand, dollars to enter either a managed investment via a unit trust or a term deposit.
In some ways the important thing is not what you invest in – though investing in your own home is tax advantaged and a very good asset to own yourself. Whilst we live in a capitalist economy, it’s important to get some of that capital and get it working for you – rather than hiring it from others. That means the sooner you get into the savings habit, the sooner you’ll get on top of things financially.