When your income goes up and down like a yo-yo, it can be difficult to put aside regular savings towards a deposit on a home loan, but budgeting with a fluctuating income is not impossible. Every penny counts when you’re self-employed and saving, and you know the reward of owning your home will be worth it. So we’ve gathered 7 great tips on how to save for a deposit if you are your own boss.
1. Put more into savings during peak season
You should make it a habit to put a certain percentage or amount of your income into your dedicated “deposit savings”, even when times are lean. But when business is good, instead of spending the extra cash, pretend times are still lean and add it to your savings pile. Give the savings account a specific name (“House Fund”) and keep it separate to your regular accounts, so you can’t be tempted to sneak some money for other purposes.
Where should you put your savings, you ask?
That’s ultimately a personal choice, but do some research into any high interest savings accounts and term deposits that are on offer, to make sure you’re getting the most out of the savings you’re squirreling away. Term deposits typically have higher interest rates than bonus savings accounts if you can afford to put a large chunk of savings out of sight and out of mind for 3 months or longer. As for your weekly efforts to set aside some extra cash, we can help you choose an outstanding value savings account for yourself or for your business.
2. Set a goal for as large a deposit as you can
Work out how much you’ll need for a deposit on a home in the area you like, then add on the extra upfront costs of buying such as stamp duty, legal expenses and so forth. Write your dollar figure down as your savings goal and put it somewhere you’ll see it regularly – the fridge, a sticky note on your computer monitor. Basically anywhere you can get a daily reminder of what you’re working towards.
When the Barefoot Investor, Scott Pape, teamed up with ASIC’s MoneySmart to offer his tips on buying your first home, he said you should save up a 20% deposit or more if you are a “normal” first home buyer.
However, low doc loan customers will generally require a deposit of 40% unless they want to pay compulsory Lender’s Mortgage Insurance (LMI). This may mean it’ll take you longer to save up your deposit if you want to avoid the LMI charge.
The Barefoot Investor also advises to factor in the possibility of at least a 1% rise in interest rates over the course of your loan. This way, you can prove to both yourself and the bank that you can afford to pay off your mortgage if the RBA cash rate shifts. Realistically, it’s worth factoring in a rise of up to 3%, particularly in light of our currently low interest rate environment.
3. Forgo luxuries for a set time period
In the first world, we live with a lot of luxuries as “standard” and consider ourselves deprived if we can’t afford them. But when you know the difference between needs vs. wants, there are lot of quick and easy ways you can save money on wants without feeling deprived of what we need.
One helpful trick to achieve this is to set yourself a time period during which you’ll give up some of your luxuries, and mark off the days on the calendar. For example, you can cut out your vices – whether that means no alcohol in Dry July and Ocsober, no takeaway coffee in March for National Nutrition Month , or no Foxtel subscription during FebFast.
Just don’t splurge when the time period for frugalness comes to an end. Your reward should be your savings – not buying a new present for yourself!
Here are just a few other easy ways to save in your daily life:
|Put aside just 5% more of your paycheck as savings.|
|Join the home brand movement when you do your groceries.|
|Make your own lunch.|
|Limit trips to shopping centres, or you’ll end up seeing things you want but don’t need. Any time you need new clothing or even furniture, visit the op shop and bag a bargain.|
|Wait 30 days to consider any purchase before you buy it. That way, you’ll know whether it’s a need or a want.|
|Tackle the No Spend November challenge.|
If you’d like to play around with your budget to see where you could be saving more, try our budget planner calculator here. Or you can use MoneySmart’s free TrackMySPEND andTrackMyGOALS apps on your phone for a month, to make sure you spend and save according to your budgeted plans.
4. Consider a low doc loan
A low doc loan is a home loan designed for self-employed people and other contract or freelance workers who do not receive regular payslips. Self-employed people may still be eligible to apply for a “normal” home loan, but a low doc loan is a good option if you aren’t able to meet the long list of documentation required for the traditional route. You will still need to be able to prove a consistent level of income that will meet your monthly repayments, but this can be done using your BAS, tax returns, or other forms of documentation instead.
5. Lower your credit limits
We know it sounds counter-intuitive to lower the credit limits on your credit card and any business loans, but it will help when you make your home loan application. The bank looks at the maximum credit limit on your lines of credit, not how much you owe on them, so you need to show that the mortgage will be the only large debt you’re trying to repay.
6. Consult a mortgage broker
It always pays off to get professional advice early on in your planning, so that you know what you’re aiming for and what you need to do to get there. A mortgage broker can assess your financial position and explain how banks will see it, and outline any changes you need to make before you apply for your home loan of choice.
Getting professional financial advice has two major benefits. You save time, effort and money because you know you’re working towards your goal the right way. You also protect your credit rating by making sure you are fully prepared when you make your home loan application, so it won’t be rejected and hurt your reputation.
7. Compare your options
Once you’ve got a plan of attack, it’s time to do your research with CANSTAR about which low doc loans offer the best value for your hard-earned cash.
Remember, do your sums about what you can afford, and don’t rush into anything until you know you’re ready. Check out our Budgeting and Saving page for more tips on keeping your head in the saving game