Investing basics: how to make your home deposit savings work as hard as you do
Saving for a home is tough. Don't make it harder. Read our definitive guide on how to make your money work while you save.
Saving for a first home is tough. You've cut back, skipped dinners out with friends, settled for boxed wine, and put up with being labelled stingy by your mates.
But with a median apartment in Sydney now fetching over $600,000, you'll probably need to come up with $120,000 for a 20 per cent deposit, not to mention the myriad costs associated with buying property. That's a big ask, even for the best savers amongst us.
Flat wages and the ballooning costs of essentials such as rent and electricity have only made this task more difficult.
So, what can we do? While there's no substitute for sticking to a well-crafted savings plan, there are several ways you can put your money to work by investing it as you continue to save.
While investing your cash puts your capital at risk, keeping all your savings in the bank could mean that you fail to meet your house deposit goals.
Before you draw up an investment strategy, do your research, understand what you're investing in, and remember that you should invest only what you can afford to lose.
And if your savings are on track to allow you to buy a home within the next five years, then investing your cash is probably too risky. The market could crash, and your investments would have too little time to recover. Most balanced -- moderately risky -- investment strategies have at least a five to 10-year time horizon.
But if you can afford to speculate, here are three ways you can super charge your home deposit savings:
Term deposit
A term deposit is a popular, essentially risk-free, and simple way for people to upgrade their savings. It's a savings product, generally created by banks, credit unions and building societies, that allows you to invest your cash for a fixed term -- number of years -- and receive a fixed rate of interest.
However, the price you pay for choosing the safe route is considerable. Because of stubbornly low rates interest rates, you probably won’t reach your goal anytime soon by tucking away your hard-earned cash in the bank. For example, CBA is currently offering customers an interest rate of 2.65 per cent a year for a five-year deposit (capped at a maximum investment of $49,999). That's not bad, but you could be doing better.
I like to think of a term deposit as like having a drop-kick boyfriend -- or girlfriend -- it's not bad to have and it's nice to have someone reliable to come home to every night, but they might hold you back from reaching your goals.
First-home buyer’s super savers scheme (FHSS)
I know, it's a mouthful, but this new national scheme was specifically built to give first-home buyers a leg-up in saving for a home.
The scheme works by allowing you to make voluntary payments from your salary, above the 9.5 per cent mandatory superannuation contribution, and earn interest on those contributions. The maximum you can contribute to the scheme is $15,000 each financial year. But you are not allowed to exceed $30,000 in total.
The interest you earn from those contributions will not be the same as the returns you make from your super fund. Instead, it is set by the Australian Taxation Office and is currently about 4.5-5 per cent. Note that tax is both payable both on the way in, and on the way out of the scheme.
Once you're ready to apply for a home loan, you can ask for your savings to be released from your super fund. You can find more information about the scheme on the ATO website.
Managed funds
As explained in the video above, a managed fund is an investment vehicle that allows a large number of people to pool their money and invest in a range of securities such as stocks, bonds, property or commodities. Funds have differing objectives such as to deliver a regular income or capital growth for the investor. Funds are grouped together into categories determined by this aim and by where in the world the underlying stocks or bonds are from.
A fund can be actively managed, where an appointed individual – helped by a team of researchers - picks which securities to invest in from a larger pool. Alternatively, it can be passively managed, where the investor can gain exposure to a particular index or commodity, providing that investor with the same returns as the underlying market.
While there are a multitude of managed fund investment strategies out there, one of the safest options for someone trying to save and invest for a first-home deposit is to look for a fund that has the following characteristics:
Diversified: meaning the fund holds many different asset classes e.g. shares, bonds, property so it’s protected if one asset class nose dives
Balanced: meaning the portfolio will split its holding 50/50 with higher risk growth assets such as shares with lower risk growth assets like cash and bonds.
Low cost: according to Morningstar's database, of the funds which analysts cover, the average multi-asset balanced managed fund charges fees of 0.84 per cent.
This sort of fund should give you steady returns with medium risk. By using the Morningstar Funds-Screener you will find a range of managed diversified funds. Make sure you look for funds with a gold rating.
On average, funds in the Morningstar multi-sector balanced category returned 6 per cent every year for the past five years. This is well above the amount you would otherwise earn in a savings account. Most investment portfolios let you start investing with a relatively small amount (such as $10,000) and allow you to add to it over time.
Wait, aren't investment portfolios risky?
Yes. Every investment has risks. A balanced investment portfolio can never be as “safe” as cash in the bank. There is always a risk that a portfolio’s investments may underperform or decline in value – we’ve all heard about stock market corrections. So, the key issue is to choose your portfolio carefully and opt for one with a strong track record. But keep in mind, past returns are no guarantee of future gains. You should also choose a portfolio that suits your risk tolerance and investment timeframe.
Investing doesn't have be about betting big on what you think might be the next Facebook, or making thousands off a single trade, Wolf of Wall Street style. It can be as boring as putting your hard-earned savings into a vanilla investment fund and watching it slowly grow.
If you feel worried about investing and want some more guidance specific to your situation, you can reach out to a financial adviser who thinks about these issues every day. Financial advice can be expensive, but you can use a service such as Adviser Ratings to search for an adviser who understands your needs and goals. Also check out our previous article How to sniff out a bad financial adviser so you can feel confident about the advice you're receiving.
Saving for a home is tough. Don’t make it harder. Put together a budget, start saving, and think about how investing your cash could be a good way to super charge your deposit.
This article is part of an ongoing educational series from Morningstar. The previous article can be found here.
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Emma Rapaport is a Morningstar reporter, based in Sydney.
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