Purchasing your first home can seem so far away, but a financial planner can help you achieve your goal by establishing processes to keep you disciplined and consistent and work towards your goal.  In a lot of cases the role of a financial planner is similar to a personal trainer, although the technical expertise is helpful, the main benefit is often simply keeping you honest with yourself and having someone to remind you to do what you know has to be done!

The first step is to identify the cost of your home, it is important not to over extend. It is best to identify what you would like to pay in repayments each month and work backwards to determine how much that repayment translates to in total borrowings; this should be your upper limit. A financial planner can do this calculation on your behalf.

Once you have identified what your mortgage payment will be each month, we compare this to your current housing costs, this should be less the your repayments for your home. Future Financial Services call this difference the mortgage savings gap. This Mortgage savings gap is used to save for your deposit and legal costs.

The theory behind this is clear, if you want a home, you will have to be making these payments shortly, so if you cant afford to put this money aside now, you wont be able to when you purchase your home.

The plan is simple, set up a low risk investment, ideally a cash management trust or another fixed interest investment and each month contribute the mortgage savings gap into this investment. This will create the habit of making the mortgage payment once you buy your home, and will show excellent savings history to the lenders when you are trying to get finance and most importantly build funds for your deposit and legal costs.

In addition to the mortgage savings gap, many couples are able and prepared to make some short term changes to their lifestyle to save for a house, changes they are happy to make for the short term to achieve their goal, but not for the length of the loan. Some people are willing to sacrifice the occasional dinner at a restaurant or their annual holiday. We call these fast track savings, the amount people will be able to fast track is harder to pinpoint. Some people have lots of “fat” in the budget they are prepared to temporarily cut out, others do not. To make it easier as our clients forego these “luxuries” as they do so we encourage the to immediately save the funds into the “home account”, that will prevent the temptation to spend it down the track, and if clients can see why they are making the sacrifices and can see their “Aussie dream” getting closer, the sacrifices are easy to make.

The final area for saving is the “ongoing surplus”,this money that will be left over after a client makes their mortgage payment (or current housing costs plus the mortgage savings gap) with their normal lifestyle. Not everyone has this gap, but we encourage clients to save these excess funds as well.

A real life working example

A Client wanting to purchase a house worth $400,000, currently has no savings. The client is currently paying $350 a week rent. The estimated mortgage savings gap is $170 per week.

The couple currently have dinner in restaurant every week spending about $100, they are prepared to reduce this to once a fortnight. They also spend $200 as a couple most weekends on their lifestyle, they are happy to reduce this by $50 a week. This fast track savings totals $100 per week.

They normally spend $1000 on an annual holiday, in order to achieve their goal, they are prepared to forego this until they purchase their home.

Unfortunately they don’t have an ongoing surplus.

This couple have identified $270 per week they are able to save for their goal as well as $1000 from their annual holiday. This equates to a little over $15,000 a year. Given modest investment earnings of about 4% The couple will have about $38,000 for their home in as little as 2 years.

They will be well prepared to make mortgage payments as they have already based their budgeting on housing costs the same as their mortgage payment and their lifestyle will in fact improve as they will no longer have to make sacrifices to fast track savings.

A dream that seemed so far away is achievable with some discipline and planning.

If you are interested in saving for a home please contact us at Future Financial Planning Phone: 02 47276588 or via our contact page.