As property prices rise rapidly in some capital cities, the savings for a deposit on a property often represents a significant chunk of a person’s yearly income.
Yet this amount should not dissuade would-be investors!
Whether you already own property or are planning your first purchase, buying an investment is an achievable goal.
If you’re a first-time buyer…
Set a target
Putting aside money that could instead go towards indulgences is not an easy task. It’s even harder when you have no clear plan or purpose. People really struggle with savings unless they have a specific goal in mind.
Saving needs to be a mind-set. You really need to want to succeed. This alone will help build up your savings. Sitting down with a mortgage broker or financial adviser can increase people’s motivation by giving them a clear understanding of their goals.
While five or 10 per cent deposits allow people to get into the property market faster, lender’s mortgage insurance (LMI) can dramatically add to the monthly cost of a mortgage. If you know that saving an extra $10,000 is going to save you $5,000 in lender’s mortgage insurance, that’s pretty good motivation.
First-time buyers should be aware that the costs of buying go beyond just the deposit. Legal fees, inspections, stamp duty and repairs all need to be taken into account when saving.
For investors, for untenanted properties, an initial vacancy period might also add to the cost. You’re also going to have to pay an agent to find a tenant. Investors who take these issues into account from the start are less likely to be hit by unexpected expenses.
Formulate a savings plan
Once these goals are set, the next step is working out how to meet them. A savings plan needs to start with evaluating “money in, money out”. The very first thing that you have to do is know where your money is going already. Many clients who get to the end of the month and cannot account for their outgoings. It’s very hard to set a budget if you don’t know what your status quo is.
Scrutinise your current spend and make active decisions as to what you’re not going to spend and what you’re going to save instead. Once you have identified your current spending patterns, set a series of short-term goals to help you move towards the end goal. While it might be tempting to challenge yourself to achieve high savings targets, realistic goals are more likely to be effective. Set yourself up for success, not for failure.
Set a budget, including all fixed and variable expenses. These variable expenses are where savings can often be made. Often, investors fail to account for infrequent costs, like replacing a computer or getting a haircut. Remember to plan for emergencies.
Make sure you get your financial situation in order before beginning to save. Credit card debt may cost 20 per cent interest, so clearing up those debts first can prevent money being wasted.
The ability to save a deposit only addresses one half of the affordability question. The second half is ensuring you will be able to service the mortgage. It’s making sure you can afford it if interest rates move up. Planning for the future can ensure you can live comfortably after the property has been bought.
If you already own a property…
First-time investors who already own a property are at a distinct advantage. The equity in their existing property can help underpin the purchase of another. If you already have a mortgage, your savings should be working for you inside your mortgage. Select a product that allows you to make extra repayments against your loan rather than holding savings in a separate account.
Offset accounts can come into play in these circumstances. When it’s time to buy, the investor can pay that lump sum off their home loan and then have a much smaller home loan and a bigger tax deductible investment loan. Make sure your lender allows access to those funds for another property purchase.
First-time investors face a host of challenges, but the deposit is the most daunting. A savings plan accounting for your goals, lifestyle and circumstances can put your first investment property within reach.