Paul's Insights: saving for a first home, looking beyond savings accounts
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.
Frequently Asked Questions about this Article…
The Reserve Bank's recent cash rate cut to 0.5% is beneficial for first home buyers as it leads to lower interest rates on home loans. This can make borrowing more affordable, helping buyers enter the market sooner.
Saving for a first home deposit is challenging because savings accounts offer low interest rates, and returns on cash are fully taxable. Additionally, rising home values can make it seem like the goal of owning a home is moving further away.
The First Home Loan Deposit Scheme (FHLDS) allows first home buyers to enter the market with just a 5% deposit. However, it is limited to 10,000 applicants each financial year, so not all buyers can rely on this scheme.
Lenders favor borrowers with a large deposit and low debt relative to income because these buyers are more likely to secure the lowest home loan rates, reducing the lender's risk.
According to the MoneySmart website, it takes an average first home buying couple about 4.6 years to save a 20% deposit, making it more of a medium-term goal.
Yes, first home buyers should consider spreading their savings across a balanced portfolio of investments. This approach can potentially fast-track their deposit, though it involves balancing risk with reward.
First home buyers can use online tools like InvestSMART’s property savings calculator to determine how much they need to save. This tool helps create a roadmap based on how their money is invested.
Paul Clitheroe is the Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board, and chief commentator for Money Magazine. He provides insights and guidance on financial literacy and investment strategies.
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