Dreaming of your very own home? Then it’s time to think about how to start saving for a down payment. While the thought of saving a large amount of money can be pretty daunting, it doesn’t have to be with a little careful planning. Read our guide for some smart saving tips so you can reach your down payment goal faster.
How Much Should I Save?
This depends entirely on the price of the house you’re looking to buy and the home loan you can get based on your income. There’s no point aiming to buy a $500,000 house if you should be looking in the $300,000 range.
Most banks have online affordability calculators where you can put in your monthly income, expenses and home loan term to find out how much your home mortgage might be, and the down payment you should aim for.
Lenders may let you pay less than 20% for your down payment if you meet the criteria for a low deposit home loan. However, a down payment of less than 20% could see you paying Private Mortgage Insurance (PMI) which adds to your monthly home mortgage payment.
Commit to Regular Saving
The key to accumulating funds for your down payment is saving regularly. Once you know how much down payment you need to save, work out how much you can comfortably afford to set aside from your pay. Be realistic. Don’t save so much that you can’t pay bills or afford to meet up with friends. It’s better to save a smaller amount for longer than trying to save too much.
Open a separate savings account and set up an automatic payment to transfer the amount across on pay day. Once you get into the habit of regular saving, you won’t even miss the money and a separate account removes the temptation to spend. An account that rewards you with bonus interest for saving and penalizes you for withdrawals is a good way to keep on track.
Bank Any Windfalls
During the course of your saving you may be lucky to receive a windfall or two. These can come in the form of a work bonus, pay increase, income-tax refund, gift from parents, or selling a personal asset. By depositing any windfalls directly into your savings account, you can significantly speed up your savings. Even a couple of thousand dollars per year can fast forward the process.
A note on gifting. While a gift of money from a parent or relative is a huge help when saving for a down payment, you may need to prove to lenders that it isn’t a loan that you need to pay back, so ask the gifter to include a signed letter stating this fact.
Have An Emergency Fund
One of the quickest ways to deplete your savings account is to dip into it for emergencies. A sudden car repair here, an unforeseen medical bill there, and before you know it, you’re back to square one! That’s why it’s a good idea to also put aside some cash to pay for emergencies so you don’t have to use your down payment savings.
Aim for at least three months’ worth of expenses but if you can’t afford it, having $1,000 squirreled away is better than nothing. You can keep your emergency fund in your checking account for ease of access, just be sure to top it up if you use it so the balance is always high.
Review Your Budget
Once you’ve got into the habit of saving, and are comfortable with it, review your budget to see if there are any areas you can tighten up. You might be surprised at how much extra you can actually put away. Here are some ideas, and alternatives:
- Save money on rent: move into a cheaper apartment/take in a roommate
- Cancel your gym membership: ride your bike to work
- Eat out only on special occasions: prepare home-cooked meals
- Cut back on entertainment: entertain at home
- Reduce your clothing budget: buy cheaper or pre-loved items
- Cut down on groceries: buy cheaper food brands or in bulk
- Cancel cable subscription: use free streaming services
By tweaking your lifestyle, you could save hundreds of dollars a month which means more money for your down payment fund.
Even More Ways to Save
Saving for a 20% down payment definitely takes commitment but if you’ve got this far then you’re doing well. If you’re more confident by the hefty amount of cash you’ve accumulated, you may want to take it up another notch. Here are some creative ways to reach your goal even quicker:
- Sell some stuff on eBay
- Take a staycation
- Spend-free weekend per month
- Pay with cash not credit
- Make your own cleaning products
- Choose low or no cost entertainment
- Adjust your insurance premiums: Talk to a REX Insurance Agent Today!
- Use less power by being more energy efficient
Take On a Side Gig
Last, but not least, one of the quickest ways to boost your savings, is to pick up a side gig. Even if you have a full-time job, there are lots of ways you can make extra money on the side:
- Sell handmade crafts on Etsy
- Dog walking
- House sitting
- Cleaning houses
- Referee sports teams
- Personal trainer
- Online tutoring
- Music lessons
- Music lessons
- Freelance writing
- Social media manager
- Create an online course
- Mystery shopping
- Movie extra
Don’t Forget Closing Costs…and the Rest!
Saving for a down payment is one thing, but you’ll also need a good chunk of cash to complete the purchase. Closing costs vary but you should budget at least 2-3% of your home loan for these. Then there’s prepaid expenses, such as insurance and real estate taxes, plus utility adjustments.
Lenders may also require you to have a certain amount of cash left in your account, typically two months reserve, to ensure you can make your first home loan repayments. To successfully close on a house, you need to factor in these additional cash requirements into your home buying plans. Talk to a REX Home Loans agent. They can help you navigate your first home purchase, and get you low rates!
For inspiration while you’re saving be sure to check out REX’s homes for sale in your area, you could be closer than you think to moving into your dream house!