It takes more than five years to save a home deposit, but here's how to do it quicker

It now takes an average first-home buyer couple more than five years to build up a deposit to buy an entry-level home in Australia’s capital cities, according to the Domain First Home Buyer Report, but there are ways to accelerate the saving process that don’t involve the bank of mum and dad.

Savvy first-home buyers can use multiple strategies to shave years off the time it takes to build up enough money to buy, and not all of these tactics require dramatic lifestyle changes.

1. Automate your saving

Saving money can be easier if you set up a money management system to take the guesswork out of the process.

Aspiring home buyers should set a savings goal each month, and keep their money out of reach to avoid the temptation to spend, says Domain Home Loans chief executive Kareene Koh.

“Move that money into a seperate account so you have to consciously choose to dip into it rather than seeing what is left over at the end of the month,” she says.

You can also arrange with your employer to pay a set portion of your salary into an account without card access.

A term deposit is another way to keep your savings locked away for a term you choose, usually between one month and five years.

According to ASIC’s Moneysmart website, term deposits typically offer higher rates than savings accounts, and “the more money you put in, or the longer you invest, the higher the interest rate.”

2. Deep-dive into your spending habits

Next, it’s time to analyse your spending habits with a fine-toothed comb to identify ways to save. 

Look through your transaction or credit accounts and start to map where your money is going. Many financial institutions make this easy to see by grouping transactions into categories such as ‘groceries’ or ‘entertainment’. 

Alternatively you can track spending in a spreadsheet, try a budgeting app like Mint, Frollo or Buddy, or use a tool like a Sankey diagram to see where you’re spending and where you can cut back.

Annualising any small but frequent purchases can help you understand how big a chunk of your income these eat up. For example, a $5 coffee every weekday costs $1300 per year, a $20 Uber ride once a week costs $1040 per year, and $100 on new clothes once a month costs $1200 per year. 

While these micro-transactions might seem insignificant, each of these examples could add up to between 1 and 2 per cent of the average full-time Australian worker’s after-tax income, and this money may be better off earning you interest instead.

3. Cancel recurring payments

Just like automated saving strategies help you control your money, automated subscription services help you spend it. 

Laing+Simmons chief executive Leanne Pilkington says cutting subscriptions not only boosts your bank balance, but can also paint you in a better light when applying for home loans.

“You’ve got to be really focused on your spending and understand what the banks are going to be looking at,” she says. 

A single streaming service can cost about $12 per month on average, or about $144 per year. But if, like many people, you subscribe to three or more streamers, that increases to at least $432 per year. Instead, you could unsubscribe from steamers you don’t use, and rejoin for a single month based on the content you want. Better yet, take advantage of free trials and binge without paying a cent.

It’s not just streamers you’ll want to keep an eye on. Companies offering subscriptions for grocery boxes, wine, razor blades, cosmetics, house plants and even toilet paper all make money from having regular access to your bank account. Make sure you only subscribe to what you need and cut off the rest.

Similarly, if your smartphone screen isn’t cracked and you don’t need to upgrade to the absolute latest model, opt for an ultra-cheap pre-paid service instead. You can save hundreds by buying a year’s access upfront instead of paying a monthly phone bill and handset repayments.

4. Invest in shares the easy way

Putting your savings to work can help you hit your goals faster, and although there’s an element of risk involved, investing in shares can be one of the most straightforward ways to invest to grow a deposit.

Investing expert and founder of wealth management business Wealth Within, Dale Gillham, says novice investors and those looking to build up a deposit should stick to the top 20 shares on the Australian Stock Exchange. 

“Each time your bank account gets above $1000, use that to buy good quality blue-chip shares,” he says. “Don’t try to be the market wizard, just buy the big stocks. Keep doing it until you’ve got 8 to 12 stocks in your portfolio of those top 20.”

Gillham says investors will receive more in dividend income from shares than they would in interest if their money was in a bank account. 

“If you’re happy to put your money in that bank, why don’t you buy the bank? They’re going to pay you more money as a shareholder, and you’re going to get the capital gain.”

“The other benefit is that, on average, your money will grow above inflation.”

Keep in mind that brokerage costs can eat into profits, so it can make more sense to invest for longer periods rather than buy and sell frequently.

Gillham recommends that people start investing when they’re young and have a 10-year outlook to weather market fluctuations, but those starting later and looking to build up a deposit quicker should aim to hold stocks for a minimum of two years. 

5. Avoid paying loyalty tax

Like subscriptions, setting and forgetting regular bill payments can mean you’ll spend more than you need to on services like utilities and insurance. 

Regularly shopping around and negotiating with suppliers, on the other hand, could save hundreds or thousands of dollars each year.

It pays to regularly compare prices for electricity, gas, internet and car and contents insurance, then politely negotiate with suppliers, using this research as justification for why they should offer you a better deal. 

Many utility providers tend not to reward loyalty with lower prices, and offer the best deals to new customers, so if your company won’t budge, it’s possibly time to switch. 

6. Get free money from the government

First-home buyers can access a range of grants and incentives, depending on the type of property and the price. 

Most schemes have price caps and only apply to first homes, and in most states, the biggest cash grants are reserved for those buying or building a new home rather than an established property.

At the national level, the First Home Super Saver scheme allows first home buyers to save money for a home purchase inside their superannuation fund. You can opt to make contributions by salary-sacrificing from your pre-tax income, or make voluntary contributions from your after-tax income, up to a maximum of $15,000 per financial year or a total of $50,000.

7. Reduce the size of your deposit

The “typical” deposit for a home is 20 per cent of the purchase price, but it’s certainly possible to buy with a smaller deposit, which can reduce the time it takes to save before buying.

For buyers with a deposit below 20 per cent, most lenders require borrowers to pay Lenders Mortgage Insurance (LMI), which is an insurance policy that protects the lender from financial loss if the borrower can’t meet home loan repayments. It’s a one-off fee paid at settlement, and works on a sliding scale, which means those with the smallest deposits pay the most LMI, and vice versa. 

As an example, a first-home buyer purchasing a $750,000 property with a $100,000 deposit (about 13 per cent of the purchase price) can expect to pay almost $10,000 in LMI upfront, according to the Helia LMI calculator, but will be able to get into the market sooner as they won’t have to save the additional $50,000 to reach the full 20 per cent deposit. 

And if you’re a doctor, vet, chiropractor, pharmacist, dentist, lawyer, accountant, mining engineer, professional athlete or an entertainment professional, you can potentially avoid it altogether as many banks waive LMI as they deem these roles as lower risk.

Eligible buyers can also avoid LMI by applying for the First Home Guarantee, a federal government scheme that allows borrowers to purchase with as little as a 5 per cent deposit, with the National Housing Finance and Investment Corporation acting as guarantor for up to 15 per cent of the property value.

Another option is having a parent or family member act as guarantor, which allows buyers to purchase with a deposit that’s less than 20 per cent of the property value without paying LMI. However, a guarantor is legally liable for repayments if the borrower defaults, so it’s not something to enter into lightly.