At just 25 years old, IT consultant Alex Loza has managed to squirrel away an amount in savings that would make many people his age envious. Living at home helps but he was also fortunate to take part in a share buyback program at his former employer IBM, which made a big contribution to his savings bottom line.
"At IBM you could salary sacrifice for shares, which I did. The shares actually grew a lot while I was there," Alex says.
He took his money out of those shares when the market turned shaky, which was just the right time for a rather large benefit. Now he is considering buying a residential property but is concerned about the state of the property market.
"The worst thing to do would be to buy a place and then, a few months down the track, for it to be worth less than the mortgage," Alex says.
But he is also cautious about the sharemarket. The reason he has so much in savings is because he sold off a lot of his equity investments.
"I guess any decision is really based on what is going to put me in the best position five to 10 years from now," he says. "I'm willing to sacrifice a bit of comfort now."
SUZANNE HADDEN
BFG Financial Services
One issue you have is the 31.5 per cent tax on interest earned on cash investments. An alternative is to invest the savings in a First Home Saver Account (FHSA), which is like a bank account for those saving to buy or build their first home but with more benefits and rules.
The advantages are that the interest earned is taxed at the lower rate of 15 per cent and you receive a 17 per cent contribution from the government on deposits of up to $5500 a year made to your account, as long as your balance does not exceed $85,000.
There are, however, significant disadvantages to the FHSA.
You will need to have contributed at least $1000 in four separate financial years to be eligible to withdraw your funds and the withdrawal must be for the purpose of buying or building your first home. Otherwise, the money in the FHSA could end up being transferred to superannuation.
Given the potential benefits total $1380 a year (tax saved of $445 and the maximum government contribution of $935), the FHSA is certainly worth considering.
TONY HARRIS
Easy Living Finance
I am totally biased towards property and I would encourage you to buy. The incentive is still the first home owner's grant.
If you intend to live in it within
the next 12 months, you'll still
get the $7000 and you can decide whether you want to live in it within that time.
The yield on property is about 4 per cent and that compares to a term deposit of 4 per cent to 5 per cent. Try to buy a property and add some value through which you can get some capital growth.
Do the research on who the best lender is and then I would also suggest you use your $60,000 to try to get a good rate with that lender and start building a relationship with them.
I think it's coming back in terms of relationships and banks offering you better rates because of them.
I don't think your $4000 in high-risk shares is investing, though. That sounds more like gambling.
PAUL MORAN
Paul Moran Financial Planning
If buying a house in the next three to four years is highest on the list, then forget shares and plough everything you have into a high-yield savings account and/or term deposit. This will become the deposit and costs on your home purchase. Ideally, you will have access to 25 per cent of the purchase price.
I strongly suggest you should be able to repay capital if you buy a home rather than just manage interest costs, so saving more allows you to set a repayment level that will actually lower the debt in a reasonable time frame.
In short, the more you can save, the better off you will be in the long term. If you wanted to start to build a long-term share portfolio as well as save for a home, you might look to shares that have a dividend reinvestment plan so you can plough back your dividends into more shares in a very efficient manner (no brokerage).
Buy a property when you are ready and focus on what debt you can afford.
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FINANCIAL SNAPSHOT
Name Alex Loza
Age 25
Occupation Consultant
Salary $70,000
ASSETS
Super about $10,000
Investments (managed funds or shares) $4000 in shares (very high risk)
Cash in the bank $60,000
LIABILITIES
Mortgage debts N/A
Credit card debts $0
Other loans None
HECS debts about $20,000
THE AVERAGE WEEK
INCOME
Salary (after tax) about $1000
Rental income (per week) N/A
Total $1000
EXPENSES
Rent Living at home ($0)
Living expenses $1400 a month
Insurance policies
Car insurance (third party only, about $450 annually)
Health insurance (extras only, think about $350 annually)
Total $338.50 a week.
Frequently Asked Questions about this Article…
What is a First Home Saver Account (FHSA) and how can it help me save for a house?
An FHSA is a special savings account for people saving to buy or build their first home. According to the article, interest in an FHSA is taxed at a lower 15% rate (vs about 31.5% on ordinary cash interest), and the government will contribute 17% on deposits of up to $5,500 a year (subject to a maximum account balance of $85,000). The combined benefit can be worth about $1,380 a year at the maximum contribution level mentioned in the article.
What are the main withdrawal rules and limits for an FHSA I should know about?
The article highlights some important FHSA rules: you must have contributed at least $1,000 in four separate financial years before you can withdraw, withdrawals are only permitted for buying or building your first home, and if you don’t meet the conditions the funds could be transferred to superannuation. There’s also an $85,000 balance cap mentioned.
Is it better to keep my house deposit in cash or invest in shares if I plan to buy in 3–4 years?
Advisers in the article suggest that if buying a house in the next three to four years is a top priority, you should favour safety and liquidity: put money into a high‑yield savings account or term deposit to preserve the deposit and cover purchase costs. The article warns that shares are riskier for short‑term goals and that $4,000 in very high‑risk shares can feel more like gambling than investing when a home purchase is imminent.
How do salary sacrifice share programs work and how did they help Alex at IBM?
The article gives Alex’s example: at IBM he could salary‑sacrifice to buy company shares as part of a buyback program. Those shares grew while he worked there and he later sold them when the market became shaky, which boosted his savings. In short, salary sacrifice lets you buy shares through payroll deductions and can be beneficial if the shares perform well, but timing and risk matter.
What tax advantage does an FHSA offer compared with holding cash in a bank account?
The article states that interest earned in cash investments can be taxed at about 31.5%, while interest in an FHSA is taxed at the lower 15% rate. Combined with the government’s 17% contribution on eligible deposits (up to $5,500 a year), the FHSA can deliver meaningful tax and concession benefits for first‑home savers.
How much deposit should I aim for before buying a property, according to the advisers in the article?
Advisers in the article recommend having a substantial deposit and ideally access to around 25% of the purchase price. They also suggest that Alex use his $60,000 to secure a good rate and build a relationship with a lender, which could help when applying for a mortgage.
Are property returns better than term deposits for a first home buyer?
The article notes that property yield is around 4%, which is comparable to a term deposit yielding about 4–5% at the time discussed. The advisers encourage buyers to look for ways to add value to property to generate capital growth, but also stress the importance of researching lenders and focusing on what level of debt you can afford.
If I want to build a long‑term share portfolio while saving for a house, what strategy did the article recommend?
The article suggests that if you’re building a long‑term share portfolio alongside saving for a home, consider shares with a dividend reinvestment plan (DRP). DRPs let you automatically reinvest dividends into more shares without brokerage, which can be an efficient way to grow holdings over time while keeping your main house deposit in safer accounts.
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