Time to rethink saving for a first home
A UK study found the average age of a first home buyer in Australia is 36[1]. That’s not too bad on an international scale. In Switzerland the average fIrst home buyer has celebrated their 48th birthday. It’s a similar story in Japan and Spain where first home owners have an average age of 41.
The ‘ageing’ of first home buyers isn’t just about rising property prices. Lifestyle choices are also playing a role. Many Australians are using their 20s to study, enjoy the freedom of renting or staying longer in the family home. We’re also delaying having children, something that used to be a key trigger for buying a home.
What’s interesting is that buying a first home in our 30s can open the door to new ways to grow a deposit that go beyond shunting money into a savings account. With a longer savings timeline, it can make sense to build a portfolio of ‘growth’ investments like shares and exchange traded funds (ETFs) that have a track record for delivering much higher returns over time.
It's true that sharemarkets can be volatile over short periods. But first home buyers who start investing in say, their 20s, can have plenty of time for values to recover.
To see the impact of higher returns, let’s say that in July 2021, a 25-year old invests $10,000 in a portfolio comprised mainly of shares and ETFs plus some cash savings. By adding an extra $500 each month, our investor will have a portfolio worth around $105,000 by age 35. This assumes annual returns averaging about 6%.
Investing the same amount in a savings account paying 1% interest – and right now you’d be lucky to earn that – would see the balance reach $74,000 in the same timeframe. That’s $30,000 less than the growth portfolio.
Looked at differently, our first home buyer would have to tuck away $750 each month in a savings account to reach the same final balance of $105,000 by age 35.
Growth assets like shares and ETFs do involve more risk. However, if you have a long term plan to buy a first home, it can be worth adding shares and ETFs to your savings mix. Compounding returns will do more of the work growing a decent deposit, so you need to tuck away less on a regular basis.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
For more on how to save for your first home click here: https://www.investsmart.com.au/what-we-offer/buying-property-planning
[1] https://www.money.co.uk/guides/first-time-buyers-around-the-world
Frequently Asked Questions about this Article…
The average age of first home buyers in Australia is 36, which is relatively young compared to countries like Switzerland, Japan, and Spain.
Australians are buying their first homes later due to lifestyle choices such as extended education, enjoying the freedom of renting, staying longer in the family home, and delaying having children.
Investing in shares and ETFs can help save for a first home by potentially offering higher returns over time compared to traditional savings accounts, especially if you start investing early.
The main risk of investing in shares and ETFs is market volatility, which can affect values in the short term. However, with a long-term investment plan, these risks can be mitigated.
A 25-year-old investing $10,000 in a growth portfolio and adding $500 monthly could have around $105,000 by age 35, assuming an average annual return of 6%.
A savings account with a 1% interest rate would yield about $74,000 over the same period, which is $30,000 less than a growth investment portfolio.
Compounding returns can significantly grow your savings over time, reducing the amount you need to save regularly to reach your home deposit goal.
Paul Clitheroe is the Chairman of InvestSMART, Chair of the Ecstra Foundation, and chief commentator for Money Magazine. He provides insights on saving for a first home in the article.
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