I was talking to someone today about the fact that the only way we were able to buy a home was getting the down payment as an early inheritance from my mother. But this wasn't due to lack of trying. I just live in a place with ridiculously high housing, both for rental and for buying (and that is with living further out and not in an expensive area), and down payments need to be 40% of the total price of the property, which makes it extremely difficult to save up money for a down payment unless you have two people earning decent salaries and live on a tight budget for quite a few years. However, in most of the world, saving up for a down payment isn't quite as ridiculous as it is locally. Here is how you can do this in other more normal parts of the world.
If you want to buy a house, there's a slim chance you can do so without getting a mortgage home loan. In some circumstances, you might have the capital to pay for the full price of the property in one go. To be honest, this usually only happens if you're incredibly rich, have just won some money, or have run into an inheritance. For the majority of us, mortgages are the only way to buy a home.
How does a mortgage work?
You apply for a loan through a mortgage provider - typically a bank or building society. Effectively, you're borrowing money to then buy the house, repaying the mortgage over time. You'll have monthly payments to make - with interest - and you pay back everything you borrowed. However, to get a mortgage, you must put a down payment on the house. This will be a percentage of its value, which will then let you know how much money you should borrow for your mortgage.
Consequently, while you don't need to save up for the full cost of a home, you will need to save money for the down payment. Here are some tips and tricks that can help you do this without restricting your budget too much:
Find out how much you need to save
The first step is learning how much you will roughly need to save for the down payment. Now, this can vary depending on how big of a down payment you'd like to make. Traditionally, 20% of the home's value was seen as a normal figure. But, in recent times, you can make a down payment of as little as 5%.
A good trick is to look at real estate websites and search for properties that suit your needs. Look in areas that you're interested in moving to, gaining an idea of the average sale prices. From here, you can take whatever percentage you like from this average price, giving you a rough estimate for your down payment. This sets a target for you to save, which you can then divide by a number of months to see how much you'll need to save each month to reach your target.
Start by seeing how much you would have to save in a year, then increase it if the monthly figures are too high. Eventually, you reach a point where you realize just how much you should save every single month, which will help you going forward.
Create a savings account
When you know how much you need to save, you can set up a standing order to make monthly deposits into a savings account. However, your choice of savings accounts is so important. Pick the wrong one, and it can take a lot longer to reach your target. Ideally, you want an account with a good interest rate, meaning more money gets added to your pot with each deposit.
This will require a bit of research, but you need to survey the options to find the most suitable one for you. Something you absolutely shouldn't do is save your money as cash away from a bank. Some people do this as a way of 'protecting' their money, but the reality is that you gain no interest. Adding interest to your savings is so helpful when you have a goal you're trying to reach.
Set up a monthly budget
One of the reasons you try to figure out how much to set aside each month is that it helps you create a budget. When you know how much to save to reach your target in the given period, you can work backward from there. Look at your monthly income, then subtract what you will put in your down payment savings account. From here, take away all the essential expenses you have each month: bills, etc.
At this point, you should be left with a sum of money that accounts for non-consistent essentials and other purchases. By non-consistent essentials I mean things like food - you don't spend the exact same amount every month, but you need to buy it. So, try to set a food budget for every week, translating into a rough monthly food budget. As a result, you will have money left over to pay for anything that's not essential. Sticking to this budget is critical to saving money without feeling like you're living paycheck to paycheck.
Spend less money on rent
Easier said than done, but if you can minimize your monthly rent, you will find it much easier to save money. In fact, it could help you save more money each month, meaning you reach your goal a lot faster. How can you spend less money on rent? There are three main options to consider:
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Move to a cheaper place - If you can, look for a cheaper home or flat to live in while you save money. Even if you're paying $50-$100 less per month, that's an extra $600-$1200 per year for your savings account.
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Live with your parents - Again, if possible, this can really help you save money. In fact, if you're young and single, it is a good idea to stay with your parents for as long as possible. Provided they are okay with this, of course! In essence, it can help you live rent-free until you're able to afford a home. Naturally, much depends on your relationship with your parents and their approach to having you at home!
- Sublet - If your tenancy agreement lets you do so, you can sublet a room in your home to someone else. This means they pay you, which you can put towards the actual rental price. In reality, whatever you charge them will go towards your savings each month.