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How to save for a home deposit

Balancing how much money to save for a home deposit

Whether you are a first home buyer or potential investor, saving for a home deposit isn’t easy. With interest rates rising and the RBA continuing to hike rates through 2023, you may be feeling a bit disheartened to get into the housing market. 

While it requires money, know-how, and a lot of savings, there are reasons to stay positive. With the right tips and tricks, you can fastrack your way to putting some cash down on your next property sooner. So, the question is, what can we do?

What is a home deposit?

Your home deposit is what you contribute towards the total purchase price of your property. Many home loan providers expect your deposit to be 20% of the total value of the house. This is also known as the loan-to-value ratio or LVR. 

If a borrower accepts a LVR lower than 20% (such as 10%), then you’ll normally be required to take out lenders mortgage insurance. This insurance is taken out by banks and financial providers to make sure they are covered in the event that you default on your home loan (it doesn't cover you, as the borrower). Essentially, if you are putting down less than 20%, you are typically classed as a riskier borrower by the lender.

However, if you are a first home buyer with a deposit less than 20%, you may qualify for the First Home Loan Deposit Scheme (FHLDS). Under the scheme, borrowers with at least a 5% deposit can avoid paying LMI as the Federal Government guarantees the remaining deposit requirement of the home loan (up to 15%). As of the 2022 federal budget, 35,000 places were opened for the 2022-2023 financial year. 

Also keep in mind that, along with the deposit, other costs may arise, like stamp duty which differs from state to state. This means that you may have to save a little bit extra than just the amount of your deposit to ensure you’re covering all your bases and aren’t left completely cashless once you’ve put your money down. 

However, take note that some states have exemptions under certain conditions. So if you’re a first home buyer and have property in mind that sits below a certain threshold, you may be entitled to stamp duty exemptions. Make sure to double check what the specificities in your state or territory are. 

Also, it's important to remember that the bigger the home deposit you put down, the less you will have to borrow from your home loan lender. This means you won’t have to pay back as much and can reduce interest repayments as well. It also shows lenders that you are smart with your money and can save effectively so it’s beneficial for your home loan approval. It’s a win win.

RELATED: Home buying mistakes to avoid

Ways to save for a home deposit

Saving for anything can be tough, especially when it’s 20% of the price of a property. To help you get there, we’ve compiled four simple steps that can get you ready for when the day arrives.

1. Take a look at your current spending habits: fully assessing your current financial situation and the way you spend your money can give you huge insights into where you need to be more frugal. Whether it’s writing up an excel spreadsheet or scrolling through your bank statements, decide which of your spending habits are more indulgent than others. Then, assess whether you can reduce them, or cut them completely, so that you’re putting more money aside towards that deposit! Consider putting your income through a money test to check if you are ready to financially commit to a home loan.

2. Create a budget: once you’ve assessed your current spending habits, set a goal and timeframe for your savings. A good budgeting strategy to follow is the 50/20/30 rule, which allocates 50% of your income to needs (like groceries or electricity bills), 30% to wants (so your little indulgences like Friday night drinks with your mates) and 20% to savings (like for your home deposit). With a clear framework like this it may be easier for you to track where your money is going. If you need to separate your home deposit savings from your other earnings, you could also open a separate savings account or a term deposit.. Similarly, if you need even more of a helping hand with putting money aside, there are plenty of budgeting and saving apps available that can guide you.

3. Get on top of your debt: having other debt lingering, like on credit cards or a car loan, could be getting in the way of you reaching your savings target for your home deposit. In this case, try and tackle your debt first or make it more manageable so that you have more funds to put away for your next property. If you’ve got multiple debts, you might want to roll them into one manageable payment with a debt consolidation loan.

4. Open the right savings account: With rising interest rates, many savings accounts have been continuing to lift which has made them an attractive option for people looking for a place to park their cash. While a lot of Aussies already have more than one savings account, many don’t know which ones are the best for growing their cash. If you’re planning to deposit regularly, choosing a high interest savings account can help you make more on monthly interest than a standard account.

What happens once I've saved up my home deposit?

Once you’ve saved up enough money, you’re probably wondering how you go about purchasing your property. Your payment method will generally depend on whether you plan to buy the property privately or at an auction. If you buy the home privately, you must sign contracts with your vendor and make arrangements for the deposit to be paid, usually via cheque or bank transfer. Sometimes you are able to pay 10% first up and then pay the other 10% a little bit later.

Alternatively, if you are buying at auction you are required to put down your deposit on the day, this is commonly done via a personal cheque.

A few quick reminders about home deposits

  • For home deposits under 20% of the property purchase price you may have to pay lenders mortgage insurance
  • First home buyers may have not have to pay as large an initial deposit
  • Remember to account for additional costs, like stamp duty
  • The bigger the home deposit the less you have to borrow for your home loan
  • If you pay at auction, you pay on the day
  • You can pay for your loan via personal cheque, counter cheque or bank transfer

Want a little bit more info before you make a deposit on a home? Head over to our Home Loan comparison table to compare providers or have a read of our helpful tips and guides.

Polly Fleeting
Polly Fleeting
Money writer

Polly is a personal finance writer specialising in loans and credit cards and general consumer banking. She has a degree in Journalism from the University of Technology, Sydney.

Cameron Thomson
Cameron Thomson
Money writer

Cameron, with a background in radio and degrees in creative writing and history, is RG146 certified in Generic Knowledge. He tracks savings rates and trading platforms, aiding Aussie consumers in smart investments.