Ten ways to save for a house deposit faster

One the biggest hurdles to buying your home is saving a house deposit. For decades, this challenge has been growing. In this article you’ll find ten ways to help you save the deposit faster.

What is a house deposit?

A house deposit is your initial contribution to the purchase price of a property. On day one of owning your new home, it represents the portion of your home that you already own.

Whether you’ve already started saving or are just about to begin, its important to examine the size of the mountain you’re about to climb.

How long will it take to save for a house deposit?

In September 2023, a 20% house deposit for a home in Australia with the median value was approximately $148,000 (excluding transaction costs like stamp duty). household earning the median gross income it would take 10.0 years to save this amount. (Source: ANZ Housing Affordability Report, November 2023)

This assumes a 15% savings rate and its what we’ll focus on improving in this article.

1. Set a house deposit target of 20% of the purchase price, plus stamp duty.

As humans, we thrive when we set ourselves a target and saving for a house deposit is no different. 

Having a target value will help you backward engineer what your weekly expense budget needs to be (more on that later) and it also helps motivate you when you feel like you’re losing your way.

So how do I work out how much to save for a house deposit? 20% of the purchase price plus stamp duty is the answer that will help you avoid paying extra for  Lenders Mortgage Insurance (LMI). LMI is required by banks when you take out a home loan and your loan-to-value ratio (LVR) is above 80%.

By the end of 2023, the median national home value was $757,746. While there is no simple calculation for stamp duty and the relevant house deposit level, LMI here could cost anywhere from ten thousand dollars up to almost one hundred thousand dollars.

The best bit about targeting a house deposit size that avoids LMI is that you can always decide later on that you’re prepared to incur the cost. 

2. Buy a copy of the barefoot investor

The Barefoot Investor can be found for around $20 and it’s the best investment you’ll ever make. The fastest way to order and have a copy delivered is through Amazon.

Since being released by Scott Pape in the early 2000s, this book has been updated regularly, but the original message is still the same. There is a specific chapter on buying your home, including saving for a house deposit, but don’t skip ahead.

Pape’s 9 steps tackle everything from setting up different buckets to help you mentally organise your money, through to understanding compound interest and how it interacts with your debts and savings. There is too much in this book for me to describe.

Barefoot sets out a pathway to financial independence that doesn’t ask you and your partner to be robots. Instead it accepts us humans for who we are and helps us trick ourselves back into prioritising our long term goals over instant gratification.

This is one book you’ll want a physical copy of your own of. Insert tabs, write in the margins and talk about it with your friends and family.

3. Pay down your debts, one by one.

But what’s this ‘tax free’ business?

Let’s take an example where you have $1000 in a bank account earning 5% p.a. interest. You would need to pay tax on the interest you earned during the year, meaning your effective interest rate is lower (by amount determined by your marginal tax rate.

With a loan, you simply don’t pay tax on the amount saved, meaning you’re effectively earning 5%. Let’s see how it works.

So if you have both savings and loans, it is almost certain (depending on the different interest rates) that you will be better off eliminating your debts. If you are still left with some debt, the next step is to begin paying them off one at a time.

To make sure you have the complete picture, make sure you gather all the info on everything from credit cards, to car loans, bank overdrafts, personal loans and even your HECS-HELP loans.

There is no right or wrong order in which to pay down loans, but my preference is to start with your credit card, which almost always has the highest interest rate.

Now that you’ve eliminated your debts, it’s time to maximise the compound interest to help you grow your house deposit. Almost all banks and financial institutions offer a high interest savings account (the term deposit still exists, generally pays lower interest rates).

It pays to do your research, as the best rates offered by each bank changes frequently as they choose to compete more fiercely for depositors at different times. While comparison sites are a good place to start, they generally don’t monitor every bank.

You might be able to find a better deal by shopping around. Similarly, some banks have ‘under the counter’ offers that give higher interest rates to savers than what they advertise. Visiting a branch or making a phone call can be the fastest way to boost your house deposit.

Finally, the Australian Government has a bank deposit guarantee that guarantees your deposits (up to the value of $250,000) are safe when at an Authorised Deposit-Taking Institution (ADI). Make sure to ask the question before opening an account.

4. Consider the First Home Super Saver (FHSS) scheme

The First Home Super Saver (FHSS) is a scheme regulated by the Australian Government and is designed to help you save money for your first home. It utilises the tax and investment benefits of super by allowing you to access up to $50,000 of voluntary contributions you’ve previously made into super plus deemed earnings on these contributions.

While a little complex to understand at first, the FHSS offers some real benefits to first homebuyers:

• Voluntary contributions (e.g. salary sacrifice), where concessional, can reduce your taxable income and, ultimately how much personal income tax you pay.
• Increases your savings by reducing the tax rate on contributions and deemed earnings from your marginal tax rate to 15%.
• All purchasers are eligible for the FHSS, so the benefits can be cumulative for a couple or siblings that are buying together.

The FHSS scheme is not without fine print and potential disadvantages. For more detail, please see the Australian Tax Office's FHSS webpage and always seek professional advice before making any decisions.

5. Set a weekly budget

Budgets suck, they are zero fun. Wait, they’re negative fun. But they help us live within our means and build towards our long term goals like saving for a house deposit.

Having set a house deposit target earlier, it’s time to backward calculate a weekly target. Start by agreeing with your partner how many years you are prepared to take to accumulate your house deposit. Now convert this to weeks and divide your deposit target by this number.

 

While our calculations are a little simplistic, you now have a target that might look a bit daunting. Perhaps, but it isn’t panic stations yet. Let’s compare it your current income and expenditure by converting your post-tax income (i.e. what lands in your bank account) to a weekly number.

Similarly, try to sum up all your expenditure and convert it to a weekly number. Between payments directly from your bank account (like rent and utilities) to credit card statements, this will no doubt be messy. Don’t forget the once-a-year charges like insurance, and car registration and servicing.

Your excel spreadsheet will begin to take shape and allow you to compare your weekly savings to your weekly house deposit target. If there is a gap (i.e. your spending exceeds your budget; a negative ‘gap to budget’ number), let’s look at our options.

• Increase the number of years to save the deposit – this will bring your weekly target down
• Look for areas to reduce your weekly spend (see the next couple of sections)
  
• Add in interest earned from savings – be conservative, as you’ll still have to pay tax.

If all of these options still leave a significant gap, then it is time to look at trade-offs. Does your future home need to have one less bathroom or bedroom?

If that’s not possible, have a chat to LongView about our Buying Advisory service and Buying Boost product. We know property and we’re here to help.

6. Save early and save often

Compound interest is often referred to as the eighth wonder of the world. The power of time and interest means that a dollar saved on day one of saving for a house deposit is far more valuable than a dollar saved on the last day.

For simplicity’s sake, let’s take the humble morning coffee for you and your partner. They cost $5 each when you buy them on the way to work.

Today you both skip those coffees and save $10. At a 5% interest rate compounding daily, as your high interest savings account does, your deposit will have grown by $16.49 (64.9% more than saving $10 on the last day).

This example ignores inflation and tax, but still illustrates that saving early can have a huge impact. Now let’s look at how a small but frequent change can boost your deposit dramatically.

Let’s say you buy a moka pot, grinder and a couple of reusable cups to make those delicious daily coffees at home. When on sale you’re spending around $300. The beans and a dash of milk will cost $1 per coffee meaning you’re saving $8 per day. After 6 weeks you’ve paid off your investment.

So at a saving of $8 per day, you’ll pay off your initial purchase after 6 weeks. After 10 years (the average time to save for a house deposit) you’ll have saved over $37,000 of which almost $29,000 is savings and over $8,000 is interest.  

What’s more, mastering the moka pot is a fun challenge and you’ll be pretty chuffed with the flavour and aroma of your morning cup of joe. Check out James Hoffmann's entertaining video tutorial.

7. Make the trade-off free switch

Truly appreciating the power of compound interest is the best way to save for a house deposit sooner. The second is to supercharge it by throwing fuel onto the fire. The good news is that there are savings to be made with few trade-offs everywhere.

By making the switch across utilities, subscriptions and memberships, you can boost your savings and compound interest dramatically. Some examples include:

• Internet
• Mobile phone plan
• Health insurance (making the switch and utilising ‘no gap’ inclusions)
• Electricity and gas
• Car insurance
• Increasing excesses on car and health insurance
• Music and video streaming services
• Gym and fitness memberships

There are many more savings to be found than just list. Keep your eyes out for a more detailed article on this by LongView soon.

If you’re happy with your current providers, then an effective alternative is to call them and say you’re leaving for a competitor if they don’t offer you a discount. It doesn’t work every time, but you’d be surprised how often it does.

One final thing to remember, is that this approach to saving benefits from making an early switch. Every month of saving will add to your house deposit and compound interest.

8. Watch out for scams 

The numbers are in, and its not pretty. The Australian Competition and Consumer Commission’s targeting scams report indicated that Australians lost $3.1 billion to scams in 2022, which was an 80% increase on 2021. Almost half of all losses in 2022 were related to investment scams.

Despite this, the number of scam reports to the ACCC fell by 16.5% to almost 240,000. This suggests that while fewer people are getting scammed, when they do, they’re losing a larger amount.

With scammers and their schemes getting more sophisticate every year, you need to be more vigilant than ever. Even when it feels like saving enough for your house deposit will never end, the promise of that investment that sounds too good to be true is not a chance worth taking.

Our tip here is to treat investing your savings/deposit just like selecting your home. Find someone you trust to be a second set of eyes and devil’s advocate for any large decision.

The Australian Competition and Consumer Commission (ACCC) has been running the Scamwatch program for many years. Their advice is simple:

1. STOP – Don’t give money or personal information to anyone if unsure.
2. THINK – Ask yourself could the message or call be fake?
3. PROTECT – Act quickly if something feels wrong.

More detail about each of these steps can be found at https://www.scamwatch.gov.au/ 

9. Gamify the process 

Saving for a house deposit is hard. It requires mental effort, sacrificing immediate enjoyment and repeating it daily for several years.

Just thinking about the memories you’ll create in your home with your family and friends might be enough for some, but most of us need a bit more.

Gamification is everywhere these days because it works.

It could be as simple as scoring points for every dollar saved, but it could get creative too. Once a month sit down with your partner and plan an entire week of dinners by selecting recipes based on ingredients that on special at the supermarket. Laugh hard when a recipe has an epic fail. It’s all part of the fun.

By enjoying the challenge for what it is, you’ll build habits that can help you get to that house deposit faster.

10. Celebrate the milestones

If you’ve read this far, you’ve probably tried a few suggestions with some working and others not. Your savings might have grown, but the full house deposit still seems so far away.

It’s important to break your target down into stages and to celebrate the progress you have made. It might be an extra special date night or opening that special bottle of whisky that’s been sitting on the top shelf.

Big or small, the important thing is to make sure you create a memory by truly celebrating the milestone you’ve accomplished.

TL;DR… Too long; didn’t read.

• That was a long article. If you didn’t have time to read the whole thing, just remember:
• Set a target of 20% of the purchase price, plus stamp duty.
• Buy a copy of the barefoot investor
• Pay down your debts, one by one.
• Consider the First Home Super Saver (FHSS) scheme
• Set a weekly budget
• Save early and save often
• Make the trade-off free switch
• Watch out for scams
• Gamify the process
• Celebrate the milestones

If you’re a year or two into your journey and you feel like you’re not making as much progress as you’d like, contact us at LongView. Our property experts have options to help you speed up the process.

NOTE: This article is general in nature and does not constitute financial advice. It does not take your personal objectives, financial or taxation situation or other needs into account. Before acting, you should consult a qualified and independent finance professional.