HOW TO SAVE FOR A DEPOSIT

Saving for your first home?

Here’s some ways to get your deposit sorted

1. Create a time machine and
go back in time to invest in Bitcoin

2. Win the lotto

3. Work, budget and save

4. Visit the Bank of Mum & Dad for
a gift or have them be Guarantors


Option 1 is likely if not completely impossible. Option 2, the odds are probably not in your favour.

If you end up at option 3, this is normal. If you read the news you may believe it’s a bit ‘doom and gloom’ where you can no longer have that avocado on toast and can only eat tuna and rice instead – but this doesn’t always have to be the case.

Finally, while not an option for everyone, it can help fast-track you into your first home through either the Bank of Mum and Dad or with a Guarantor.

The first step in getting your deposit sorted is via budgeting. When budgeting, you need to understand:

  • How much money is coming in and out each month, putting these numbers in a few columns on paper or in Excel can help

  • How much can you afford to save regularly towards your deposit

  • What can you cut back on

To help you understand how much you can afford to save and what you could potentially cut back on you, first need to work out what essential expenses you have. This can include:
- Fixed expenses ie. Rent, electricity, gas, phone bills, school fees, medical costs, insurance, transport costs, basic food and groceries
- Debt expenses ie. personal loans and credit cards which you need to pay off
- Unexpected expenses ie. pet costs, car repairs, unforeseen medical bills

Once you know the above, you can then set yourself a spending budget and see what you may be able to save. If you find yourself with little room to save, you are not alone. This is where some tips below may help you find ways you can cut back.

Quick tip

If you have personal loans, leases, or credit cards, it’s a good idea to consider paying these off. The interest on these can often be quite high, if you’re not paying it off before the due date.

Groceries

1. Weekly plans:
Make a weekly plan for meals including lunches and snacks. Check what you already have and then make a shopping list to buy only what you need. Buy the essentials.

2. Meal preparation - especially for Monday to Friday:
Commit to planning your meals for the week which is important to avoid spending too much money on ‘eating out’.

3. Look for specials, essentials and click & collect:
If you shop at Woolies or Coles, check out their app to find their specials. You can also complete your shopping at the same time, helping keep track of spending. Review and ensure you are only buying essentials. Click and collect avoids delivery fees.

4. Compare unit prices:
Check the unit price i.e, $ per 100g under the main price, and shop for the most cost-effective option.

5. Vege garden:
If you have the space, make a herb and vegetable garden to grow things yourself.

Bills

1. Shop around for better deals on electricity and gas

2. Compare insurance premiums when it comes time to renew

3. Review your internet and phone usage and make sure your current plans are not over-catering or under-catering to your usage. Compare different options.

4. Heating and cooling – only heat or cool the room you are using. Open or close blinds to help control the temperature inside. Adjust your air conditioner to an energy-efficient setting. Block draughts to avoid leaking heat (for example, put a door snake against the door). Keep doors closed to retain heat or cold.

Other ideas

1. Streaming services. Choose one and cancel the rest. You can always start and stop different subscriptions to keep freshening things up. Also, try out the free streaming channels and apps.

2. Gym memberships – checkout running groups in your area, try free online workout videos and fitness challenges.

3. Instead of going to restaurants with friends when catching up, try taking it turns to cook for each other or together at each other’s places.

While not available to everyone, if you’re lucky and your parents
are willing and able to help you get into the property market, it
may help you get in faster and sooner.

There are two ways parents can help you out:

1. A gift – a lump sum that you can use as a deposit towards
the purchase.

2. Provide a guarantee - this is done where your parents will offer a property they own as security alongside the property you
purchase. See more on this below.

If your parents, siblings or grandparents are willing to allow you to use their property as security, you can look at borrowing up to 107% of the property you’re looking to purchase with some lenders.

This means you can effectively enter the property market without using any savings/cash of your own and without needing to pay lenders mortgage insurance (LMI).

The lender can lend you enough to cover, not just the purchase price, but also the stamp duty, legal costs, and lender fees. The bank will essentially take security over both properties, the one you’re buying and your parents, siblings or grandparents property.

Here’s how it works:

Value of purchase price: $1,000,000
Loan amount: $800,000
Loan to valuation ratio (LVR): 80%
Lenders mortgage insurance (LMI): nil

Costs:
Deposit: $200,000
Stamp duty: $39,735
Solicitor costs: $2,500
Miscellaneous costs: $900
Total cost: $243,135

Value of guarantors property: $2,500,000
Loan amount: $243,135
Loan to valuation ratio (LVR): 10%
Lenders mortgage insurance (LMI): nil

Note: The guarantor isn’t required to make repayments. They are only providing the bank with additional security to cover the $243,135 loan.

Given we have an additional property for the bank to take as security (the guarantor property) this $243,135 cost can be put against this guarantor’s property. In the end, the borrower is responsible for both $800,000 and $243,135 loans but the bank has both properties as security. We’ve now been able to purchase a property, without needing to put any savings towards it.

If the purchaser/borrower isn’t able to keep up with repayments, the lender then turns to the guarantor to make the repayments.

Pros

  • You can enter the property market sooner

  • You don’t need to pay Lenders Mortgage Insurance

  • You don’t need to save as much

  • You can get access to a cheaper interest rate as the bank deems you to be of lower risk given they have more security to cover the loan

Cons

  • You as a purchaser are stuck with having your parents / inlaws / grandparents on your loan with you as guarantors until you pay it down enough or the property you’ve purchased, increases in value

  • While it’s an amazing thing for a guarantor to be able to help out their loved ones, there’s a big responsibility here so it’s important to understand the risks by obtaining independent legal and financial advice

  • As the guarantor, effectively you’re offering to take on responsibility for the home loan if repayments can't be met.

A few definitions and important factors to note:

- Borrower: You (the person buying the property)
- Guarantor: Typically the parent and the person who is providing the additional property as security. Most lenders prefer a close relative, parent or grandparent, to be the guarantor.
- No cash is being put up or borrowing(s) by the guarantor: The guarantor isn’t responsible for putting up any cash, just their property as security. They aren’t borrowers on the application either.
- Only a part of the guarantor’s property is secured: The lender will limit the guarantee to the small loan that the guarantor is putting up as security, not the full loan.

FAQ’s

  • The bank takes 2 properties as security for the loan to be taken out for the purchaser. The primary property is the banks main security and the one being purchased. The guarantor’s property is the second security that the bank takes a mortgage over.

  • Lenders like to limit the guarantor to close relatives such as parents, siblings or grandparents.

  • For the purchaser, you’re stuck with having your parents / inlaws / grandparents on your loan with you as guarantors until you pay it down enough or the property you’ve purchased, increases in value.

    While it’s an amazing thing for a guarantor to be able to help out their loved ones, there’s a big responsibility here so it’s important to understand the risks by obtaining independent legal and financial advice.

    As the guarantor, effectively you’re offering to take on responsibility for the home loan if repayments can't be met.

  • You can enter the property market sooner.

    You don’t need to pay Lenders Mortgage Insurance.

    You don’t need to save as much.

    You can get access to a cheaper interest rate as the bank deems you to be of lower risk given they have more security to cover the loan.

  • Not necessarily a lot more. A few extra fees for the guarantor given they’ll need to obtain independent legal and financial advice. But generally, cheaper rates can be accessed given the bank has more security.

  • Once you pay off the loan portion which the guarantor is securing, you can release the guarantor. Or, once you have enough equity in the property that the bank/lender holds as security, only then is it ok to release the guarantor’s property as security.

    Typically, the guarantor is not able to be released until you have built up at least 10% or 20% of equity in your own purchased home. This is to avoid paying LMI.

    Releasing a guarantor usually requires an internal refinance which your mortgage broker can manage for you. Alternatively, you can build the equity on your loan by making extra repayments to bring the loan balance down quicker. A full assessment of your circumstances is required to determine the borrowers eligibility to release their guarantor.