How to double the power of your deposit

Simon Pressley — Wed, 27 Jun 2018 04:31:43 +0000

In modern Australia, the housing affordability musings attract more newspaper column inches than a royal wedding. For most, the biggest challenge isn’t being able to afford the mortgage repayments – it’s putting together a deposit for the purchase. Let’s face it, if you’re trying to save a ten to twenty per cent deposit to buy a median-priced house ($1,033,892) or apartment ($878,325) in Sydney, you’ve got your work cut out for you. But for those who reside beyond the Harbour City or for those prepared to explore the increasingly popular rentvesting strategy, the opportunity to purchase a piece of Oz is there for those with an open mind. Property Investment Professionals of Australia (PIPA) recently pointed out that a detailed study of mortgages and incomes shows the average loan is more easily serviced now than it was thirty years ago. The problem isn’t affordability per se – Australia is littered with locations offering affordable housing – but rather accessibility, because the hurdle is putting together a deposit rather than paying back the lender. There’s a narrow, inaccurate and slightly offensive assumption by the broader media and political landscape that “the Australian property market” is a proxy term for Sydney real estate. Last time I checked, Sydney was a city, not a country! If you’re willing to break free of that misnomer, I can show you how to double the power of your deposit. Mindset The first important step in understanding the solution is to remember Australia consists of 10 million dwellings that are spread across 550 local councils, and the vast majority provide affordable real estate options to potential buyers. With our realistic view of Australia’s whole market now firmly front of mind, let’s run the figures and see how you can power up your savings and get into a property. According to the Australian Bureau of Statistics (ABS), Australia’s capital city average median dwelling price was $686,700 as at December 2017. A buyer would therefore need $68,700 for a 10 per cent deposit. Adopting the national median rent of $435 per week, the annual holding cost (after rent) on a typical property worth $686,700 with a 10 per cent deposit would be $13,100 per year – that’s before taxation or negative gearing benefits. This cash flow calculation assumes receipt of rental income for forty-eight weeks of the year, interest expenses calculated at 4.5 per cent, and other standard holding costs (property management fees, council rates, insurance, and $500 for general maintenance). The solution to double your deposit The simplest way to double your deposit is to buy a property that’s priced at half the capital city average dwelling price. That’s right – instead of laying down $70,000 as a deposit for a purchase of almost $700,000, try broadening your mind and seeking areas where a house price closer to $350,000 is the norm. Remember – the phrases ‘more expensive property’ and ‘capital city location’ don’t automatically translate into ‘better capital growth potential’. If you doubt this, ask yourself why property markets in Sydney and Melbourne both declining right now while Hobart is booming and parts of regional Australia are strengthening nicely. Buying an investment property worth $343,500 (half the capital city average house price) using your $68,700 deposit means you’ve fronted up 20 per cent straight away. The annual holding costs will now be significantly less at $850 per year, because you’re only borrowing 80 per cent from the lender. If saving up a deposit of $68,700 is too steep, how about halving your goal to $34,350 and using it as a 10 per cent deposit on a $343,500 purchase? The annual holding costs would be a very manageable $2,400. And, if you’ve purchased in a location with all the fundamentals in place for great long-term growth, the asset is working for you straight away. This means you’re in the market and enjoying the benefits sooner. The key takeaway from all this is that you shouldn’t stand back and struggle waiting to save up a deposit for an expensive property that will be more difficult to service and has no more, if not less, potential for capital gains than some non-Sydney investments. Instead, lower your buy in, look for smart locations and start reaping rewards sooner.

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How to conduct a financial spring clean so you can save for a home loan deposit

Bessie Hassan — Fri, 30 Sep 2016 03:33:32 +0000

Despite industry competition, home loan promotions and a low interest rate environment which characterises the current mortgage season, acquiring property still sits on the expensive end of the spectrum for many Australians, and the notion of completing a 20 per cent deposit is both a fiscal and emotional challenge. As it turns out, we may become a nation of renters. New research commissioned by finder.com.au found that 47 per cent of renters are considering renting for their lifetime if property prices continue to move north. This culture of renting is a knock-on effect of housing unaffordability which has seen 3.6 million Australians locked out of the property market. However, we shouldn’t be disheartened. Saving up for a deposit (although the idea may be a little off-putting) is still achievable. But in the current climate, it means we need to do a little extra legwork to pursue homeownership. Follow these steps to carry out a financial spring clean so that you’re better equipped to save your deposit. 1. Step back and reflect on your financial behaviour Understanding and improving your relationship with money is a great way to begin your financial audit. What kind of spender are you? Does the thought of your credit file make you want to cringe or are you confident that you repay your bills on time? Are you an impulsive spender or are your purchases well thought-out and planned? Do you make regular deposits into a high-interest savings account or do you spend every cent you earn? Take an honest look at your financial behaviour and think of ways to improve it. One way you can do this is to request a free copy of your credit score and your credit file as this can give you a snapshot of your financial position and help you decide what to do next. For instance, if you’ve missed mortgage or credit card repayments you may want to consolidate your debt to boost your savings (this will also help you better manage your debt). 2. Evaluate your existing costs With a renewed understanding of your financial habits, you can be proactive about budgeting but first you need to cut back on existing costs. Think of the full spectrum of your expenses including transport, household bills, utilities and entertainment and consider ways that you can lower these costs. Are you getting the best deal on your internet bill? Can you save on your weekly groceries by shopping online or at a budget supermarket? A saving of just $50 a week will go a long way to your deposit fund (especially if you’re earning interest on your funds). Be ruthless when it comes to removing unnecessary expenses. If you’re eating out three nights a week, consider pulling back to one night a week. If you’re paying $95 for a monthly phone plan with features you don’t use, it may be time to downgrade 3. Have a number in mind For a full documentation home loan, you normally need to complete at a 20 per cent deposit if you don’t want to pay lender’s mortgage insurance (LMI). This means you need to come up with 20 per cent of the property purchase price which gives you an idea of what you need to save. So if you’re looking at a property with a $550,000 price tag, you’ll need to save $110,000. Speak to an Accountant or Financial Adviser to set a savings target and a realistic timeframe of when you can save this amount. Generally you should allocate about 10-15 per cent of your total savings for your home loan deposit, however this will depend on your income and financial commitments 4. Get tactical After trimming your existing costs and setting your savings goal, you need to think of the tactics you’ll follow to achieve your goal. This may be making regular deposits into a high-interest savings account or finding ways to make some extra cash such as by refinancing to a more affordable home loan or by taking on extra freelance work 5. Be diligent about saving, and learn the art of compromise A clear savings goal and timeframe will motivate you when it comes to making lifestyle changes but it’s also important that you have a diligent and long-term approach when saving for a deposit. Being diligent not only means sticking to your savings goal but it also means being proactive about saving and coming up with tactics (as discussed above) to help you realise your savings goal. For instance, if you have more than one credit card you may want to apply for a balance transfer so you can pay no interest for a specified period. You need to mentally prepare yourself to make sacrifices along the way. If you want to meet your savings target, you’ll need to resist overseas holidays and expensive impulse purchases 6. Consider a co-borrowing agreement If you can buy a property with a close family member or friend, then saving for a deposit may become a whole lot easier. However, before you decide to go down this path, protect yourself by having a co-ownership agreement in place that outlines both of your financial responsibilities. For example, you’ll need to agree on the goals, financial contribution, legal and tax implications before signing on the dotted line. Saving for a deposit is by no means easy, but you can certainly pave the way for success if you’re savvy about your finances and you follow steps to improve your financial wellbeing and your propensity to save for a deposit.

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How to double the power of your deposit

How to conduct a financial spring clean so you can save for a home loan deposit