Arguably the hardest part of getting a foot on the property ladder is saving money to buy a home.
When you’re facing a 20% requirement by banks for a down payment on a traditional loan it can seem like a daunting task.
So if you want to own a home without a government backed loan or have to pay extra for mortgage insurance, you have to look at ways you can set aside the 20% down payment you need.
It may seem out of reach, but there are lots of incentives for figuring out how to save money for down payment on a home, check these out:
- You’re more likely to qualify for a mortgage
- You avoid private mortgage insurance for loans less than 20% of the sale price
- You enjoy more affordable mortgage payments
- You may be able to get lower interest rates
- You have instant equity in your home.
So let’s get right down to the practical business of how to save money for a house.
Here are six concrete steps you need to follow to make it happen.
1. Figure out how much you need to save
The first step is to figure out exactly what sum of money you’re aiming for. You can do this by looking realistically at the kind of home you can afford in your area. The best way to do this is to jump on a few mortgage calculators and find out what you can feasibly get a mortgage with a down payment of 20%.
Lenders will look closely at your loan serviceability, that is, what your income is and if it will cover your mortgage payments. So even if you save up $50k as a down payment for a $250k home, you need to be able to make the payments on the remaining $200k plus additional homeowner expenses such as utility bills, insurance, maintenance, and more.
2. Break it down into monthly payments
Once you have a realistic figure in mind, the next step in how to save money for a house is to determine how much of your income you can set aside each month to go towards it. This will also give you an idea of how long it will take to save. For example, if you want to save $50k and can comfortably put aside $1k per month, that’s $12k per year. You should reach your goal in just over four years. That doesn’t seem too bad, right?
3. Automate the savings process
It’s a lot easier to save a large chunk of money when you automate the process. This means setting up an automatic payment out of your cheque account each week. Ideally, the funds should transfer to a high-interest savings account where you can’t easily access it, and the funds can accumulate compound interest. Taking away the temptation to spend is vital, and to do this the money needs to be squirreled away without you seeing it.
4. Cut down on unnecessary costs
To save your dedicated amount it’s likely you’ll need to make a few sacrifices along the way. Whether it’s cutting back on a daily coffee, dinner out, or clothing purchases, or all of these, be prepared to make room in your budget. Homeownership typically requires a tighter budget anyway so think of it as good practice for the future.
5. Save all windfalls
A good practice to get into is to save any windfalls you get, these can dramatically shorten the saving process. Windfalls could include work bonuses, gifts of money, income tax refunds or profit on the sale of assets, like a car. An extra few thousand dollars a year will be a big help to fast-forward you to your goal, especially if you’re earning a decent amount of interest.
6. Plan for unexpected expenses
Unexpected bills will throw off your down payment game plan. The money has to come from somewhere, right? But dipping into your home savings account is the last thing you want to do. That’s why it’s a good idea to have a well-stocked cash cushion (aka emergency fund) to pay off any nasty surprises before they get out of hand.
Owning a home needn’t be something that’s out of your reach if you make a realistic savings plan and stick to it. Disciplining yourself to save now is excellent preparation for homeownership in the future when you’ll have a whole boatload of different expenses!