Ways to boost your Deposit for first home
Saving is not easy. Sacrificed overseas trips, delicious and expensive breakfasts, music festivals and buying things to like. All can be on sacrifice when saving a deposit for your first home.
To manage to save up to $20,000, $30,000 or even $50,000 appears to be huge pressure when property prices keeps on going up. You keep on saving and its always half way through to reach the point of purchasing.
Despite house prices gains in major cities beginning to stall, the damage is done – a first home buyer is likely looking at laying out around $500,000 or more. If the full 20 per cent deposit is still the goal, that means coming up with $100,000. How, then, can a hopeful first home buyer put their existing savings to work for them while they continue to save?
The methods outlined below focus on investing for income, rather than growth, so would theoretically boost an ongoing savings plan, rather than replace the task altogether.
It’s always best to speak with a financial adviser or planner before embarking on an investment strategy, and remember that, in all forms of investing, past performance is not a good indicator of the future.
That said, here are few ways young people could invest for income to put toward a first home deposit.
1. Term deposit:
This is extremely popular territory for young savers. As far as risk goes, there’s pretty much zero. The bank will tell you in advance what your return will be, and you know exactly when you’ll be able to re-evaluate your investment. The cost of that peace of mind, however, is large. Thanks to a global plunge in official interest rates, one-year term deposit rates in Australia have dropped to a record low of 2.25 per cent on average. It’s an easy-to-understand and safe way to store your savings but, unless official interest rates start rising fast, will provide almost no income. After a year, your hard-earned $30,000 will only bring in an extra $675. If you roll it over for five years, you’ll have a total of $33,530. The yield on investments have move over time and since the after effect of the GFC, the trend has been down.
2. Using Equity from parents:
Lots of Australians young people don’t realise that they can actually their parents or elder siblings who own properties and have reasonable equity on through their properties can support the younger ones by helping them by being a part of your new property and enabling them to enter the property market much quicker with less efforts. Parents or elder sibling can be part of the property by 98:2 or 99:1 and use their existing property equity to support young ones after a while when the younger ones gets stable with the finance they can actually buy back their share in the property.
4. Fractional property investing:
For those hell-bent on using property as an investment but lack the capital – meet fractional property investing. Heaps of funds providers offer the opportunity to gain diversified exposure to the housing market while lowering the bar for entry. A lot of entities are a managed investment scheme which uses a crowdfunding campaign process to pool property investors together. The investors then contribute as much as they want towards the purchase of a property and receive “shares” in return. Investors can buy and sell their shares to other investors. BrickX, similarly, buys a property in advance and then offers 10,000 shares, or “bricks”, in that property, which are sold individually to investors. Both offer distribution to investors from rental income in line with their number of shares.
5. Superannuation:
The proposed first home Super Scheme offers the chance to temporarily tack your savings onto your super and be taxed at a lower rate than usual.
Announced in the May budget but still to be fully legislated, individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total, to their super account, according to the federal government plan. These contributions and earnings would then be taxed at 15 per cent and can be withdrawn only for a first-house deposit. Withdrawals will be taxed at marginal tax rates minus a 30 per cent offset.
The scheme was meant to come into effect on July 1 of this year but has been delayed.
Finally, why have we been talking about investing for income rather than growth? Because for many, buying a house remains a short-to-medium-term goal.
Plenty of analysts and asset managers will tell young investors to take advantage of their age and go for growth, which means taking riskier investment options. They can “weather the storms” better than older investors who’ll need their money sooner for retirement.
But if the goal remains buying a house, then young investors don’t have all that much time either.
It could be that all they want is to do better than the 2.25 per cent bank rate for a few years while they continue their savings plan. That’s why first home buyers should be looking around for options where their risk remains relatively low but their return is better than they would get with a bank.