27 Feb Why it’s a good idea to save for a deposit before buying a home
As a potential home buyer, in today’s harsh economic conditions, when you save for a deposit this gives you a boost. What it says to lenders is that you are reliable and are therefore a lower risk.
Saving for a deposit typically means that you can expect a rise in your affordability score. Lenders view this as a sign that you won’t have to borrow too much money from them. Saving for a deposit essentially helps you to prepare for the monthly costs you will be liable for as a homeowner.
In some cases, you could even be able to apply for a higher bond if you wish. What is guaranteed is that your monthly home loan repayments are lowered.
The reality is that home buyers who have a deposit stand a better chance of getting a loan.
How to save for a deposit:
One of the first things you need to consider is the total cost of the loan. This means that you need to take into account additional costs that come with buying a home. This includes insurance, levies and maintenance.
You then need to start working on your budget. This is an itemised summary of expected income and expenses for a defined period of time. It should ideally help to keep track of spending patterns.
In order to create an efficient budget, it’s important that you provide as much detailed and accurate information as possible.
The most common types of budgets include a fixed or variable budget, a bare bones budget or one that is based on the 50/30/20 rule, which breaks down spending habits into 3 distinct categories.
It’s important to keep in mind that a good budget relies on balance. You’ll need to work out how much money you can afford to save on a monthly basis. If this means that you cut back on spending in some areas, then do that so that you can afford to pay more towards your deposit.
It’s generally a good idea to save at least 8% of the property value, as this will cover registration costs.
What is the best way to save for a deposit?
If you’re saving over a period of a year or two years it may be better for you to use a high-interest-earning savings account.
One of the reasons that people often choose high-interest savings accounts is that they can earn interest, while also giving people the option of being able to withdraw the funds very easily.
This type of account is also an ideal place to store money that you don’t want to spend on monthly expenses, but that you may wish to use in the near future.
A high-interest savings account can also be a great place to keep and grow your emergency fund. You can store some money away that will be enough to cover at least three to six months’ worth of expenses.
Another option could involve using a money market fund, which gives you easy access to your funds. This means that you can withdraw your money at any time without incurring penalties.
When you decide to save for a deposit, ensure that you plan ahead and that you are clear about your affordability before applying for a home loan.