Save a home loan deposit in three years

RICHARD MEADOWS
Last updated 05:00 21/11/2012
home loan deposit
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IT COULD HAPPEN: You will both need to be clear of major debts, and earning at or above the median salary of $42,000.

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Gaze into the depths of the crystal ball, and picture your life three years from now.

A picture begins to swirl out of the clouded glass: You're walking through the front door of a modest first home. The sold sign outside says $420,000. And the deed is in your name.

This is no Tui billboard - it could really happen. While we'd hate to throw yet more fuel on the housing fire, it's hardly unreasonable that people want a place to make their own.

The hard part is often scraping together a big enough deposit to get in the door, particularly if you're not earning megabucks and don't have any savings already.

But the following example demonstrates how even an average Joe and Jane can get their foot on the property ladder by making a few simple saving decisions.

The Rules

This is a game for two players, so you will need a special friend. You will both need to be clear of any major debts, and earning at or above the median salary, which according to Statistics New Zealand is roughly $42,000.

The way you win the game is to save up a 20 per cent home loan deposit in three years. Based on the average national house sale price for the past three months, that means the magic number is $84,000.

Obviously this isn't for everyone, but it is achievable by following three simple steps.

Step One: Consider KiwiSaver

KiwiSaver was designed for retirement saving. But it's also becoming quite popular for building a home loan deposit, says Capital Advice owner and mortgage adviser Kit Jackson.

"It's a question of making people aware of what it actually offers, as well," he says.

Most KiwiSaver providers will let you tap your nest-egg early for a first home purchase, with two juicy carrots to boot.

The first is that your employer has to match your contributions to at least 2 per cent (soon to be 3 per cent). 

That's effectively a 100 per cent return on investment for the money you put in, that you'd struggle to beat in even the dodgiest of investment schemes.

In our example, our couple are both contributing the mid-range 4 per cent of their salaries. 

The second big bonus is up to $10,000 cash that you and your partner can get fellow taxpayers to put towards your deposit.

The first-home deposit subsidy is administered by Housing NZ, which says you can apply if you've regularly contributed to KiwiSaver (or another complying super fund) for at least three years.

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The subsidy is $1000 for each year, up to $5000 per person - well worth having.

Step Two: Basic maths

You'll have to set aside much more than 4 per cent of your pay to make any headway on saving a deposit.

"A rule of thumb which many people use is to spend no more than 30 per cent of your income on housing - rent or mortgage," says David Kneebone, executive director of the Commission for Financial Literacy and Retirement Income.

Most renters obviously won't be paying anywhere near that much, leaving plenty of room for saving.

Work out what your annual rent payments are, and subtract them from one third of your income - the balance is what you can start squirrelling away.

Our young couple are prepared to rent a room in a flat for $200 a week, allowing them to put away a combined $17,000 a year in additional savings.

Step Three: Set and forget

Divide the figure above by 12 months, which works out to $1416 for our couple.

Set up an automatic payment right after payday that diverts that sum straight into a basic savings account. Now is not the time to be playing the stock market with your hard-earned cash.

"I know it's boring but keeping the house deposit savings in the bank is still the best option," says Spicers financial adviser Jeff Matthews.

To invest in any other shares or property investment, you need a minimum of three to five years, he says.

"While the one to three year returns from shares etcetera are looking good, the five year returns are flat to negative, so timing is everything."

The likes of RaboBank offer a low-fee 3.4 per cent interest call account, so you can probably hope for 2.5-3 per cent after tax.

With all that done, you can kick back, relax and do nothing.

Year One:

Your KiwiSaver contributions together with your employers' have fed $5000 into your combined accounts. The pair of you have saved close to $18,000 into your high-interest bank account. 

After taking out tax, KiwiSaver, rent and savings you still have close to $40,000 left over in the household accounts to cover food, power, transport, clothing and all the other costs of living.

Year Two:

By the end of the second year you already have close to $50,000 saved between KiwiSaver and your bank account. Compound interest is beginning to slowly add up too.

Year Three:

Congratulations - you've made it! The final tally includes the $10,000 deposit subsidy, assuming you've both been contributing for five years, $16,000 in KiwiSaver and $56,500 in the bank.

Well, just about. That adds up to $82,500, so it might take another month or so to hit the agreed deposit size.

The whole process is painless because it comes straight out of your pay, and disasters aside, shouldn't put too much pressure on the household.

As mentioned, this won't be appropriate for everyone, like those with kids or debt or single incomes. But at the very least it's a good example of the power of regular saving.

Here are some alternative situations for people with other needs.

The older couple

Flatting or renting a shoebox apartment for a few years is understandably not going to float everybody's boat.

Lots of first home buyers are happy to do so, says Jackson, but some couples want their own space.

Let's say our own couple are paying $400 a week in rent, instead of $200.

That's a lot less money that can be diverted towards saving. At that rate it will take roughly five to six years to save the same sized deposit.

Flying solo

If you're a single income earner or don't have a partner, you're not ruled out - you just have to be stacking paper.

"I've got single clients who - depending obviously on what they're earning - can borrow any amount," says Jackson.

In our scenario you'd have to be on an annual salary of at least $84,000 or so to crack the three-year mark.

Smaller deposit

These days the banks have cautiously begun to lend in the higher ranges, up to 95 per cent or in some cases even the full value of a property.

But the bigger the deposit, the better, says Kneebone:"20 per cent used to be the minimum deposit required, and it's still worth aiming for that."

That's because the less you borrow, the less you're going to be paying over the lifetime of the loan.
 
If you only put down 5 per cent on our $420,000 house, you'll end up paying $340,000 in interest over the whole mortgage.

That's about $50,000 more going straight down the drain compared to a 20 per cent deposit.

But the loss will actually be much bigger then that because the costs are higher too.

Banks charge a low equity fee which usually applies to deposits smaller than 15-20 per cent.

Disclosure: The information in this article is of a general nature only and in no way constitutes direct financial advice. Always consult an authorised financial adviser before making any investment decision.

- BusinessDay.co.nz

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