Conversations between homeowners and renters sometimes go like this: The homeowner will ask the renter why they waste their money on rent when their monthly payment could go toward owning a home. The renter says, “I don’t have money for the down payment.” If the renter is lucky, the homeowner shrugs, the conversation stops there, and the renter doesn’t get guilt tripped by a discussion about the intricacies of homeownership they may not be ready to consider. For many, homeownership seems like an impossible dream.
But it can seem slightly less impossible if you think about it on a shorter time span. Could you afford to buy a home if you saved for three years?
Bankrate surveyed more than 2,500 people about how they saved for their first home purchase. Millennial respondents reported needing three years to save for a down payment, while GenX needed an average two years and nine months to save. Baby boomers needed 2.5 years to save.
Editor’s Note: It’s important to note that while these are American statistics, they maintain some degree of relevancy for our Australian audience.
How much could you save for a home in three years?
If the thought of squeezing all the necessary savings for a down payment into just three years makes you feel queasy, I don’t blame you. But you may also be thinking of the old-school way of saving for a home: scrimping and saving until you hit 20 per cent of the home price.
But the typical home purchase these days only requires a down payment of 3 to 5 per cent of the home price — and that’s true for conventional loans as well as first-time homebuyer programs.
And thinking about saving for that amount can be way less stressful than thinking about what you’re going to pay over the next 30 years. So when you’re just starting to consider whether buying a home is in your future, don’t get so hung up in the 30-year maths that you scare yourself out of it and resign yourself to renting until you die.
Start by looking at a smaller amount, and calculating what you could save for a down payment in about three years.
Here’s a hypothetical example for you. Say the homes you gravitate towards in your neighbourhood tend to sell for about $650,000. You’re going to get a 30-year fixed mortgage and put down 5 per cent: $35,000.
Break that down payment amount into three years of savings: just over $10,000 per year.
Maybe that feels doable for you. You think, “I can trim my expenses and find that money” or “I’ll pick up a few extra shifts at my weekend gig.” Maybe it’s totally out of your league and forces you to rethink your approach. But thinking about saving up for a $35,000, 5 per cent down payment feels a lot more realistic than saving $130,000 for a 20 per cent down payment, right?
Sure, there are closing costs and mortgage insurance and property taxes and monthly mortgage payments to consider.
And you still need to keep a healthy balance on your emergency savings fund while you’re saving to buy a house. You need to contribute to your retirement fund so you can afford to live in your house once the mortgage is finally paid off. No one should jump into home ownership if it means straining their finances to the breaking point.
Editor’s Note: It’s always important to contact your bank and work out the right solution for you.
But if the thing that’s holding you back is the idea of a huge down payment, owning a home may be more achievable than you once thought. Play around with the numbers, and consider what you could save in three years. You may be surprised at how the numbers guide your plans, either to buy a home or to skip it for now.
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