Looking into the process of obtaining a home loan and purchasing a house, many prospective home buyers may come to the conclusion that it’s better to wait and save for a home loan. There are considerable benefits of saving for a larger down payment toward a loan. Banks offer much better rates and more desirable loan products to borrowers who have more funds available for a down payment.

 

Banks try to drum up business by heavily advertising loan products that can get you into a home for as little as 3% down, but the standard rule of thumb has always been 20% and that amount will put you in the right position to get the best loan possible. The highly-touted low or no down payment loans come with increased fees, more restrictions, higher interest rates and require mortgage insurance. Saving money for a higher down payment avoids all this and increases your loan choices.

 

If you decide that saving toward a better down payment instead of taking a less desirable loan is the best choice, there are various types of savings accounts available to you:

 

Standard Savings Account

Traditional savings accounts offered by banks are a good, readily available option for home buyers. They are essentially the oldest product offered by banks and easy to set up and manage. You will make deposits on a regular basis and earn interest, so the more money you put in to the account toward your down payment, the more your money works for you by earning increased interest. Savings calculators are available online to give you a better idea of how much you’ll have to deposit – up front and over time — and how long you’ll have to save before getting to your down payment goal. The only real drawback to a standard savings account is that it requires a lot of discipline. You will have to make a habit out of making regular deposits of the amount you planned, and also resist the urge to withdraw from the account for other things.

 

Term Deposit Savings Accounts

Term deposit savings accounts remove the temptation seen with standard savings accounts by restricting your access to the funds you deposit in the account. When a term savings account is established, the borrower and lender agree on the term of the account where no withdraws can be made. Blocking your ability to withdraw from this account insures that your savings will build instead of dwindle. An added benefit is, because the bank knows they can rely on the funds being there for them to use, you will generally see a higher interest rate from a term deposit savings account. The inability to take money back out and the increased rate of return makes this type of account very attractive to home buyers who want to save toward a larger down payment sooner.

 

Online Bank Savings Accounts

In recent years there has been a proliferation of online banks. Online bank savings accounts are an attractive option to borrowers due to their typically higher interest rates. Online banks offer higher interest rates in order to draw customers and also because they don’t have nearly all the expenses and overhead costs of traditional banks. Online banks also offer a variety of tools for borrowers to manage their accounts and the convenience of online and by phone customer service. Prospective home buyers should research online banks to compare rates and options and see if the possibility of using an online bank to save for a down payment is the right choice for them.

 

First Home Savings Accounts

A first home account is a savings product aimed directly at first time home buyers. This is a type of account offered by the government, not by traditional lenders. It is only available to first time buyers. As an incentive to promote home ownership in Australia, the government offers high interest rates for these accounts, contributes to the accounts if you make regular deposits, and does not tax the interest you earn. The first home savers account is the best option for first time home buyers in Australia who want to save toward home ownership.