October 22, 2011
Property ownership is a goal for many Australians, yet saving for a home deposit is becoming an even greater challenge as potential buyers juggle higher living costs with smaller disposable household incomes*.
Hundreds of thousands still manage to achieve the dream each year by using traditional budgeting and saving techniques, such as setting a target, formulating a plan and carefully managing their cashflow. However, some borrowers are exploring unconventional ways to help them save for a home deposit sooner.
Over the past five years, rents have increased at a faster rate than property values**, a trend I expect will continue given the shortage of rental vacancies in most capital cities. Rising rental payments and other living expenses are adding financial pressure to many aspiring buyers trying to save for a deposit and the associated purchase costs.
While penny watching and scaling back on life’s luxuries are still proven ways to save for a home deposit, there are also some not-so traditional methods Australians are utilising to get them home sooner.
Save a home deposit sooner with less conventional methods
Back up your budget with the help of the following savings strategies:
Boost your efforts via a high interest savings account. Set up an auto-transfer from your salary account for costs including regular savings for your home deposit. Alternatively, open a First Home Saver Account, which attracts a lower tax rate on interest earned (15%) and a government contribution on the first $5,000 you deposit each year. You can still claim the First Home Buyers Grant and there is no minimum deposit required to open one, but conditions do apply so read the fine print.
If selling an asset to build your deposit, plan ahead. Most lenders require you to have a genuine savings deposit. Typically, this is money saved and held over at least three recent successive months and excludes lump sum deposits from the sale of personal assets. However, some lenders will take such funds into consideration on a case by case basis, if after selling the asset you can show a history of maintaining or increasing the savings over at least three months. Research what you need.
Some lenders accept rental payments as evidence of genuine savings on the basis you have at least a 5% deposit plus there is evidence of six to 12 months worth of continuous rental history and the property is leased through a licensed property manager. Lenders will assess your eligibility for a home loan approval by comparing your current rental payments and any regular savings with the cost of the home loan repayment. If you fit the criteria, ask your mortgage broker for more information.
Ask family to guarantee your loan by using their own property as security. While this won’t put you steps ahead with your loan deposit, the guarantor will help you bridge the deposit gap (in theory only, as the guarantee isn’t money) and avoid paying lenders’ mortgage insurance. However, you must be able to service the loan on your own. The guarantee can be removed in future once enough equity is built up. Seek legal advice to ensure both parties are fully aware of their rights and responsibilities.
Cut your expenses in half by splitting the purchase with a co-owner. Sharing the purchase costs with one or more people can increase the deposit amount, helping you to enter the market sooner and with greater borrowing capacity. It can also ease the challenge of being approved for a home loan. However, it’s important to seek independent legal and financial advice prior to signing a co-ownership agreement, loan contract or purchase contract. Everyone must understand their rights and obligations as well as the plans each co-owner has for the property and their loan repayment strategy.
* Australian Bureau of Statistics 6523.0 - Household Income and Income Distribution, Australia, 2009-10** RP Data-Rismark Home Value Index results for August 2011