Grow Magazine

Save a deposit in two years

September 2016

Record house prices means saving a deposit’s never been harder.

Though property prices are soaring, Heather Jacobs explains how to calm down and save your deposit.

First home buyers are feeling the pinch, with the share of new housing finance going to first home buyers at very low levels, according to ANZ economist Daniel Gradwell. He says they’re being hit on two fronts by rising house prices and record low interest rates, which is giving them a lower return on their savings.  In September, the RBA again left interest rates on hold at 1.5 per cent.

“It’s definitely possible for first home buyers to get into the market, but according to a number of metrics it’s very difficult compared to what’s been the case historically,” says Gradwell. “If we look at how long it would take a person on the average wage to save a 20 per cent deposit, that’s at record high levels. At the national level, it’s taking about eight years and in New South Wales, it’s about 10 years.”

To put that in context, the average total household income is about $120,000 nationally and $137,000 in Sydney. Assuming they are saving 15 per cent, a Sydney based individual or couple would need to be saving about $1700 a month for 10 years to achieve a 20 per cent down payment on a $1.042 million home (the median price for a home in Sydney based on Residex’s March quarter price). Australia-wide, the median price for a home was $517,000 in March.

Apartments may be a more realistic bet for first home buyers with the median price of an apartment in Sydney reaching $691,000 in March and $474,000 nationally.

Does this mean eating baked beans for every meal over the next decade to even get a look in? Not quite, says Nila Sweeney, managing editor of Property Market Insider and founder of the First Home Buyer Academy.

“You don’t have to live on baked beans,” she says. “It’s about being sensible with your money and more importantly, with the property you buy.”

Noel Whittaker, personal finance commentator and adjunct professor at the Queensland University of Technology, also believes it comes back to how you manage your money.

“It’s not how much you earn; it’s how you manage it, which comes back to priorities,” he says. “It staggers me that the average couple will now spend $30,000 on a wedding and yet they can’t find a house deposit.”

Tips to get your foot in the door

  • Set a goal

Decide the sort of places you can live in and whether it’s realistic to save a deposit of at least 10 per cent in a certain timeframe, suggests Whittaker. For example, if you decide to buy a property for $500,000 in two years, you’ll need to save $50,000, which is $2083 a month.

If this isn’t realistic, you may need to consider continuing to rent. If it is, you may wish to speak to a lender to make sure the balance is also manageable. (There are also plenty of calculators online, such as the ANZ home loan calculator.)

“The trouble with most people is they don’t start,” says Whittaker. “Once you have very clear goal, commit to it and focus on it so hard that everything else becomes immaterial.”

  • What can you give up?

Usually if you set a goal, you need to give something up, continues Whittaker. He suggests finding ways to cut back. “Think, maybe I’ll stop buying my lunch, or not have the third cup of coffee, or not spend $15 for a cocktail on Friday night.”

For couples, Whittaker suggests living on one wage. “You might at some stage want to have kids and you might need to live on one wage, so, it doesn’t hurt to start now,” he says.

Or you can give up some of your free time by getting a second or third job.

Sweeney suggests if you have a car, selling it and use public transport instead. Or downgrade to a cheaper car instead.

  • Ask your family for help

Both Whittaker and Sweeney agree that your family may be able to help fast-track your home buying mission.

 “A lot of baby boomers are happy to help their kids – there’s a view amongst heaps of us that I’d rather help my kids now, than when I am very old and they’re 50,” says Whittaker.

“Every family is different, so the sort of help they can offer will vary. Are you expecting an inheritance from Grandpa soon? Can your parents loan you part (or all) of the deposit interest-free? Can you move back home for those two years to save on rent? Or can they go guarantor?”

  • Ditch the credit cards

Apart from tying up funds in minimum monthly repayments, Whittaker considers credit card debt a sign that you’re a bad money manager: “If you’ve got credit card debt, in most cases you’re living beyond your means and if you’re living beyond your means when you don’t have a house, you’ll be living beyond your means when you’ve got a house.”

For those with a lot of personal debt, he suggests the snowball method may be an appropriate way to pay it down. This means you attack the smallest debt first, then roll that payment into tackling the next smallest debt.

  • Reduce your deposit to 10 per cent

“You don’t have to have the 20 per cent deposit, but it [can have] many advantages,” says Sweeney. These may include more options for mortgage products, lower repayments because you’re borrowing a lower amount and avoiding lender’s mortgage insurance (LMI).

Whittaker is more sanguine, saying if the 20 per cent is out of reach, then it may be appropriate to settle for 10 per cent “If you can’t save a 10 per cent deposit, you can’t afford the house payments,” he says.

“For some people LMI is compulsory because they can’t get the 20 per cent deposit together. They get to the stage where they think, ‘should I save more or buy now?’ You’ve got to really know where the market is going where you intend to buy. If the market is not moving, maybe you can wait and save more.”

  • Get to know the market

Knowing the market could also save you money, says Whittaker. Go to open houses and auctions, look at what every place on the street has sold for and become friendly with a local estate agent. He suggests finding a motivated vendor to increase your chances of buying at a good price and finding something you can add value to.

In fact, Whittaker personally prefers houses over apartments because there’s greater scope for adding value whereas apartments are constantly competing with new builds. “If I’ve got a house I can improve the yard, I can landscape it, I can put a deck on it, add in solar heating,” he says. 

  • Buy something cheaper

Sweeney suggests viewing your first home as a stepping stone.

“You can always upgrade to a better property later,” she says. “If you go with a reasonably priced property that’s more affordable for you, then it would be quicker to save for the needed deposit and also easier to manage your repayments.”

This may mean looking further afield. While ANZ’s Gradwell predicts that prices will continue rising in Sydney and Melbourne over the next couple of years, other markets are slowing.

“In Sydney prices were up nearly 20 per cent at one stage last year,” he says. “We don’t think that is going to be repeated over the next couple of years, but we definitely don’t see prices dropping off in a big way either. If you look at places such as Darwin, Perth and some of the regional centres, prices are still dropping off in those areas as we’ve moved past the peak of the mining boom.”