10 saving strategies for first-time homebuyers

Buying your first home is an exciting milestone, but it can also be overwhelming when it comes to managing finances. Implementing smart saving strategies can make this process smoother and more manageable. These strategies not only help you build a solid financial foundation but also ensure that you’re well-prepared for one of the biggest investments of your life. In this article, you’ll discover 10 effective saving strategies for first-time homebuyers to help you achieve your homeownership dreams with confidence and ease.

Table of Contents

Creating a detailed budget

To manage your budget well, start by tracking your expenses. This will show you where you can cut costs and save more for your future home.

Here’s how to keep track of your spending:

Use a budgeting app: Apps can help you categorise and monitor your spending, making it easier to see your financial habits.
Keep a spending journal: Write down all your purchases, including the date, amount, and category, to understand your spending better.
Review statements: Go through your bank and credit card statements to find recurring costs and spot potential savings.

Once you know your spending patterns, you can identify areas to reduce expenses:

Cut down on dining out: Save money by cooking at home more often and packing your meals.
Review subscriptions: Check if you’re paying for services you don’t use and cancel any that are unnecessary.
Save on transportation: Use public transit, carpool, or bike to lower travel costs.
Limit entertainment spending: Spend less on activities like movies and shopping.
Reduce utility costs: Look for ways to cut back on energy and water usage.
Watch small expenses: Be mindful of small daily purchases like coffee and snacks that can add up.

With these savings, focus on setting money aside for your home:

Set a savings target: Figure out how much you need for a down payment and set a timeline to reach it.
Automate your savings: Set up automatic transfers to your savings account to make saving a habit.
Track your progress: Regularly check how much you’ve saved and adjust your spending plan as needed.

Knowing the expenses to save

When buying a home, the down payment is a major expense, but there are other costs to consider too. You’ll need to budget for closing costs and additional expenses after moving in.

Closing Costs Closing costs are fees you pay when finalising the purchase of your home. These usually range from 2% to 6% of your loan amount and cover various expenses like:

Loan origination fees: Fees charged by the lender for handling your loan.
Appraisal fees: Costs for having an appraiser evaluate your home’s value.
Title search fees: Fees for checking property records to confirm clear ownership.
Title insurance: Insurance to protect against issues with the property’s title.
Attorney fees: Costs for legal assistance with the transaction.
Transfer taxes: Taxes imposed on transferring property ownership.

A closing costs calculator can help you estimate these fees. By entering your loan amount and location, you can get a rough idea of what to expect, though actual costs might vary.

Moving and other costs even if your new home is ready to move into, you’ll have additional costs:

Moving costs: Hiring movers or renting a truck.
Home furnishings: Buying furniture, appliances, and other essentials.
Decorations: Expenses for making your home look the way you want.
Utilities: Setting up and paying for services like electricity, gas, and water.
Maintenance and repairs: Costs for upkeep and fixing issues, such as landscaping or plumbing.
Home improvements: Costs for remodelling or adding new features to your home.

Automated savings

Automating your savings helps you regularly put money aside for your goals. In India, there are a few easy ways to set up automatic transfers for your savings.

Online banking

Most banks allow you to set up automatic transfers through their online banking sites.
You can choose how often you want to transfer money, like daily, weekly, or monthly.
Decide the amount you want to transfer each time.

Mobile banking apps

Many banks offer apps where you can also set up automatic transfers.
These apps make it easy and convenient to manage your transfers from your phone.

Standing instructions

This is a traditional method where you can give your bank written instructions for automatic transfers.
You need to fill out a form with details like how much to transfer, how often, and from which accounts.

Direct deposit

If your employer provides this option, you can have part of your salary automatically deposited into your savings account.
This makes saving easier by eliminating manual transfers.

Using your 401(k) for a home down payment

In India, there are retirement savings plans similar to the 401(k) in the U.S., offered by employers and with tax benefits for long-term savings.

Provident fund (PF)

Required for most employees: Both you and your employer contribute to this fund.
Tax advantages: Contributions are usually tax-deductible.
Limited early access: You can’t usually withdraw money early, except in certain situations.

Public provident fund (PPF)

Optional savings plan: You can add money monthly or yearly.
Tax-free: Both contributions and interest earned are tax-exempt.
Long-term lock-in: Money is tied up for 15 years.

National pension system (NPS)

Voluntary pension scheme: Good for building retirement savings.
Tax benefits: Contributions and returns are tax-exempt under specific conditions.
Investment choices: Offers options in equity, debt, and government securities.

Reducing debt

In India, high-interest debt usually comes from credit cards and personal loans, which can have much higher interest rates than loans for homes or cars. To tackle this debt, it’s important to focus on paying off these high-interest loans first because they grow quickly due to their high interest rates.

One way to handle this is the debt snowball method, where you start by paying off the smallest debt first, then use that freed-up money to tackle the next smallest debt. This can give you a sense of progress. Another approach is the debt avalanche method, which involves paying off the debt with the highest interest rate first, helping you save more on interest in the long run. You could also make minimum payments on all your debts but use any extra money to pay off the high-interest debt more quickly.

Debt consolidation can help if you have a lot of debt and are finding it hard to make payments. This involves combining multiple debts into one loan with a lower interest rate. Options in India include taking out a personal loan to pay off existing debts if you can get a lower rate, using balance transfer offers from credit cards to move your debt to a card with a lower interest rate for a while, or entering a debt management plan through a credit counselling agency to repay your debts at a reduced rate.

Renting a room

In India, saving for a home can be tough with the rising living costs, especially in cities. One smart way to cut down on housing expenses is to either live with family or rent a room. This can free up more money for your home savings.

Living with family helps you save on rent and bills, offers emotional support, shares household duties, and can even provide cultural learning experiences if your family members come from different backgrounds.

Renting a room is another cost-effective option. It allows you to live in a shared space, reducing individual costs for utilities and common areas. Plus, it offers social interaction opportunities and flexibility in finding a more affordable or convenient location.

Resisting the temptation to dip into other savings

First-time homebuyers often make the mistake of using their emergency funds or other savings for home expenses, which can put their financial stability at risk and delay their goal of homeownership.

Using your emergency savings for home-related costs can leave you unprepared for unexpected expenses like medical emergencies or job loss. It can also slow down your progress towards saving for a down payment and closing costs, stretching out the time needed to buy a home. Additionally, borrowing from savings or other sources for these expenses can lead to debt, making it even harder to save.

To avoid these issues, set up a separate savings account for your home purchase to keep those funds distinct from your other savings. Be realistic about the time and planning required for buying a home to prevent hasty financial decisions. Make saving for your home a top priority by regularly putting aside money, even if it’s a small amount, and be cautious with your spending to avoid unnecessary purchases that could deplete your savings.

First-time homebuyer assistance programs

In India, there are various government and private programs designed to help first-time homebuyers. These initiatives offer financial support, interest rate reductions, and other advantages to make owning a home easier.

Government programs

Pradhan Mantri Awas Yojana (PMAY): This major program aims to provide affordable housing. It offers subsidies and sometimes interest-free loans for eligible buyers, with criteria based on income and location.

Credit-Linked Subsidy Scheme (CLSS): Provides interest subsidies on home loans for first-time buyers. Eligibility depends on income and location, making monthly payments more manageable.

Rajiv Gandhi Housing Mission Urban (RGHM-U): Focuses on affordable housing in cities, providing subsidies and loans based on income and other factors.

State specific programs: Different states have their own housing schemes and subsidies. Check with local authorities for details on what’s available in your state.

Private programs

Housing finance companies: Offer special schemes and discounts for first-time homebuyers.

Banks and financial institutions: Provide home loan schemes with attractive rates and terms for new buyers.

Developers and builders: Some offer discounts or flexible payment plans for first-time buyers.

Eligibility for these programs often depends on factors like income, location, type of home, and the loan amount. Each program has its own criteria, so it’s important to check the specific details for each scheme.

Choosing the right account or CDs

When you’re saving for a home in India, it’s important to choose an account that keeps your money safe and offers good interest rates. Here are some top options:

High-yield savings accounts

These accounts offer better interest rates compared to regular savings accounts and let you access your money anytime without penalties. However, they may require a minimum balance and are often available only online, which can help in offering higher rates due to lower costs.

Certificates of deposit (CDs)

CDs usually provide even higher interest rates. They come with fixed terms, which can range from a few months to several years. Be aware that withdrawing money before the term ends can lead to penalties. To manage interest rate risks, you can use a strategy called laddering, where you invest in several CDs with different maturity dates.

Recurring deposit accounts

These accounts require regular deposits over a set period and offer interest upon maturity. They generally provide better rates than standard savings accounts and might allow extra contributions in some cases.

Earning extra money

For first-time homebuyers looking to boost their savings for a down payment, taking on a side job or extra work can be a great help. Here are some effective options:

Side gigs

You might consider online tutoring to share your expertise with students through platforms like Vedantu or TutorMe. Freelancing is another option, where you can use skills like writing or graphic design on sites like Upwork or Fiverr. Selling unused items or crafts on Amazon or eBay can also provide extra cash. Renting out a spare room on Airbnb can generate income if you have extra space.

Freelance work

There are various freelance opportunities such as writing content for blogs or social media, designing graphics, programming software, translating documents, or offering virtual assistance to clients.

Part-time jobs

You could look into part-time work in retail, hospitality, or customer service. Teaching at private schools or tutoring centres is another possibility. Alternatively, you could work in delivery services for companies like Swiggy or Amazon, or drive for ride-sharing apps like Uber or Ola.

FAQs

What is a good credit score for a home loan?

A credit score above 700 is generally considered good for home loan approval.

What are some common mistakes first-time homebuyers make?

Common mistakes include overspending, not saving enough, and not understanding the costs involved.

Can I still buy a home if I have student loan debt?

Yes, but your student loan debt may affect your eligibility for a mortgage and the interest rate you qualify for.

What are some creative ways to save money for a down payment?

Explore side hustles, sell unused items, or find free or low-cost activities.

How can I save for a home if I'm a migrant worker in India?

Consider government-backed housing schemes and explore options for affordable housing in your new city.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com

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