Saving for a Mortgage
What are some guidelines for saving for your first home?
You did some research on the housing market and decided that you want to buy a 2 bedroom apartment in Norbrook, or perhaps you did some further assessments and then decided that you could only manage a quad in Portmore. How do you achieve the goal of saving for your first house? You have to have a savings plan in place. Mortgage companies typically have a requirement for anyone getting a loan to have a down payment of 10 – 20% of the value of the house. That can amount to a lot depending on where you want to live and what you want to buy.
I did a blog post on different savings options and the different returns expected from each of the different savings and investment options, but I think it would be good to show a practical example of what would be expected for you to save if you used different savings options to achieve the same goal.
First things first – you should speak with a licenced financial advisor about any investment options that you are exploring.
I Have an Idea of How Much I Need to Save- What Next?
So you have done your research and estimated that based on the home you want to purchase, you need $2 Million for the downpayment and an additional $1.4 Million for fees. How long will you have to save up to achieve that goal? If you have already started your savings goal, congratulations! If you are thinking about buying a house and are wondering how to start.. keep reading.
Let’s look at the same options with a fixed timeline of 3 years. If you needed to save $3.4 million in three years, the following amounts would have been required for each savings/investment type:
* Note the last two options are NOT GUARANTEED. You can easily lose 15% or 30% instead if you do not know what you are doing.
What does this tell you?
Option 1) If you decided to save only with a regular savings account you would have a much larger monthly payment to save to reach your goal. I am not advocating for riskier investments, but just highlighting that you would have to elongate your time frame to be able to achieve your desired goal, unless you can put away $95,000 per month. Benefits: Safest of all the options and JDIC insured*.
Option 2) A fixed term deposit or certificate of deposit account will give you a higher interest rate than a regular savings account, but the average rates for these are closer to 2% than 4%. You would have to a save a little less than with a regular bank account to get to the same goal, but still a hefty sum. Benefits: Still relatively safe and higher interest rate than a regular savings account and JDIC insured* from banks and building societies.
Option 3) Investing in a mutual fund or unit trust, depending on the time period, could give you a higher return but remember this is also riskier than a savings/fixed deposit account and you could actually end up with less than what you started with. These types of accounts are a hybrid between risk levels of a fixed deposit and outright stock investing. Speak with your financial advisor to explain more about these products. 15% represents the average return of the stock market over the past five (5) years. Benefits: Better interest rate than a fixed deposit but rates are not guaranteed and you can actually lose all your investment.
Option 4) Investing in Stocks is riskiest of them all, but over the last five years the stock market returned an average of 15 percent each year. Diversifying your portfolio may be reasonable for the less savvy investor, but if you are a stock market guru you could see returns well in excess of the 30% and reach your target even sooner. Speak with your financial advisor on how best to proceed. Benefits: If you are a savvy investor you can reach you goal much quicker but you nothing is guaranteed and you can actually lose all your investment.
There are other investment types like bonds for which the average return for the last five years was 0.6% per annum based on the Jamaica Global Bond Index. Bonds are safer than stocks but the returns are not typically as high.
How Do I Save with Discipline?
Saving requires some amount of discipline. If you are not dedicated to this goal and you would rather use all of your money than have it sitting in an account then the 1st step is to shift your mindset to feel comfortable saving. Use an option that does not give you easy access to the funds (an account without a debit card attached or not linked to your online banking).
There are several options out there to make it seamless to save without even thinking about it. Salary deductions and standing orders are options that allow you to set it and forget it. Online transfers to your savings account/investment account each month are easy if you pay bills online. You can add it to your list of ‘bills’ to ensure you make a payment to your savings/investments account as well.
Having a savings goal is great but like any goal, actionable small steps to be able to achieve that goal is key.
The discipline you develop now will assist you in developing the discipline that you need to be able to pay a mortgage of equal or greater amounts in a few years.
So if you are less inclined to take risk, then a regular savings account is for you. If you are comfortable with the volatility of a mutual fund or stock market then you can speak with your advisor about opportunities there.
Check out my article on steps to get a mortgage.
*JDIC – Jamaica Deposit Insurance Company – Insures up to $600,000 per financial institution per customer for banks and building societies.