Paul's Insights: saving for a first home, looking beyond savings accounts
First home buyers face a conundrum right now. Home loan interest rates are at record lows. But returns on savings accounts are also extremely low - and property values are on the rise.
The Reserve Bank recently slashed the cash rate to just 0.5%, and the big banks responded quickly by passing the rate cut on in full.
That’s a plus for first home buyers. But growing a deposit can be challenging – and not just because savings accounts pay very little interest. The returns on cash are also fully taxable. For a high income earner, a 2% return can quickly drop to around 1% after allowing for tax.
At the same time, CoreLogic figures show that home values nationally surged 1.1% in February – and were up 3.0% over the last quarter. For first home owners it can seem like the goal posts are continually moving further away.
The new First Home Loan Deposit Scheme (FHLDS) is making it possible for first home owners to get into the market with just a 5% deposit.
But the FHLDS is limited to 10,000 applicants each financial year. So plenty of first home buyers still need to focus on growing a decent deposit. As CoreLogic confirms, lenders favour borrowers with a large deposit and low debt relative to income. These are the buyers most likely to pay the lowest home loan rates.
Traditionally, cash savings are fine for short term goals. But according to the MoneySmart website it takes 4.6 years for the average first home buying couple to save a 20% deposit.
This makes saving for a first home more of a medium term goal, and it can pay to look beyond savings accounts alone.
Depending on your timeframe, spreading your savings across a balanced portfolio that includes a variety of investments, has the potential to fast-track your deposit. Though it does involve balancing risk with reward.
For many first home buyers, the big unknown is how much they should be tucking away to achieve their target deposit.
There’s no one-size-fits-all answer. However, online tools like InvestSMART’s property savings calculator can be very helpful. It shows you how much you need to save to reach your ideal deposit depending on how your money is invested. It won’t solve the dilemma of low interest rates or rising values, but it can offer a roadmap to follow.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.