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Saving for your first home

Saving for your first home
22 Thursday 2018

Saving for your first home

Check out property prices

The property market is continuously changing. To get a better understanding of property prices in the area you are interested in buying:

  • Go to auctions
  • Read the property section in your local newspaper
  • Refer to online real estate websites

Work out what you can afford

Perhaps consider an older, smaller property or a property in a different area, just to get you started in the property market.

Find out what your Loan to Value Ratio is?

When thinking about how much to save, it’s probably a good idea to check your loan to value ratio (LVR). This can be calculated by dividing the amount of your home loan by the purchase price (or appraised value) of the property.

Lenders use your LVR to measure the risk involved before lending you any money.

In general, the higher your LVR, the higher the risk that the lender will not be repaid and if you default on the loan, then they will be able to sell the property. Having a high LVR may also affect your ability to refinance your loan later on, and you may have to pay mortgage insurance again if the LVR on the new loan is high.

Usually, lender’s mortgage insurance (LMI) is payable if your LVR is above 80%. This is a one-off insurance premium to protect the lender should you default on your home loan.

Some lenders also use your LVR to work out the interest rate on your home loan. For example, if your LVR is more than 80%, you could be charged a higher interest rate than a borrower with a lower LVR. This could make a big difference to your repayments, so it is important to save as much as you can towards a deposit to reduce the size of your loan and try to get your LVR under 80%. Be wary, that majority of lenders prefer to lend under 80% LVR.

How to work out your loan to value ratio?

Hypothetically,  speaking if you want to buy an apartment at an estimated cost of $500,000.  You most likely will be able to afford to take out a $450,000 mortgage, so you would need to save a deposit of $50,000 plus purchase costs.

Loan to Value Ratio: $450,000 loan ÷ $500,000 property value = 90% LVR

This gives you an LVR above 80%, therefore the lender will most likely charge a lender’s mortgage insurance (LMI), so this will need to be added to the estimated costs required.

Ways to save for a home deposit

Prepare a budget and cut down on spending. Work out your essential costs, such as rent, bills and food, and deduct this amount from your income. What is left over is what you could potentially be saving for your home deposit.

Ideas on how to save money

Small changes can make a big difference to your bank balance. Some examples are:

  • Perhaps move back home and save on Rent which is a big expense
  • Hold off on using your credit card for a month and only pay for things with cash
  • Give up buying coffee or cut down on alcohol – this can both save you money and improve your health
  • Cancel your gym membership and try walking or running which is a cheaper method to get fit
  • Make your lunch at home
  • Borrow garden tools and equipment with your neighbours and friends, rather than buying them
  • Do your laundry yourself rather than paying for dry cleaning
  • Purchase your clothes at clearance sales