The long road to saving for a house deposit can be a daunting one. The dream of owning a home often seems far off, given that the average cost of a home in Australia is around $650,000 (higher if you’re in Sydney or Melbourne).
The First Home Buyers Australia surveys show many Australians consider accumulating enough money for a home loan deposit as their biggest financial challenge.
Making sacrifices to squirrel your money away for the future takes discipline, so it’s important that your money is working just as hard as you are.
Savings accounts no longer cut it
Interest rates are at an all time low, great for home buyers who already have their home deposit saved up.
The downside of low interest rates is for the savers who (at best) only get a sad 1% – 2% a year on their high interest savings accounts and term deposits.
So while the low interest rates make paying off a home loan easier, savers don’t get the same benefits.
How much deposit do I need for a home loan?
This really depends on where you want to live and if you’re buying an apartment or a house.
Most lenders require a 20% deposit to secure a home loan, and avoid the lenders mortgage insurance fee. So on a $600,000 loan you’d need about $120,000. It’s no small feat accumulating this amount of money.
The good news is you don’t have to lump all your money in a savings account. A lot of people are turning to investing to accelerate the time it takes to save up for a deposit.
Investing for a home deposit
First – if your plan is to buy a home in 1 or 2 years then you’re probably best leaving your money in a savings account.
However, if your timeframe for buying a home is longer, say over three years or more, then 90 per cent of the time you are likely to do better by investing.
In the last 5 years, people who invested in the Australian share market over the same period made returns of 8.8% p.a.
However, the average cash return (i.e. the interest rates your bank gives you) for people who left their money in a savings account has only been 2%.
Stockspot’s investment returns for the past five years have ranged from: 7.1% for our most conservative portfolio to 9.4% to our growth portfolio. We achieved this through our diversified portfolios that invest in Australian shares, global shares, bonds and gold.
If you invest $10,000 and make regular monthly $1,000 contributions over five years at a growth rate of 7%, your final balance could be $86,187.
Compare this with an interest rate of 2% (slightly more than what you’d get from most banks) and your final balance would be $74,098.
The difference in earnings between saving and investing would be $4,098 instead of potentially $16,187 if invested. An $12,000 improvement over 5 years – or potentially being able to buy that house sooner.
Stockspot’s tips on how to reach your home deposit goal faster:
Start as early as possible and get those compound returns working
At Stockspot we like to say the best time to invest is regularly. Don’t wait for market lows or highs, or for a hot stock tip, just get started. A regular habit of adding more funds to your investment is essential.
The sooner you start saving and investing the sooner you can take advantage of compound returns (as highlighted in the example above). Compounding can make a huge difference to your final balance over a longer period.
You can have some fun seeing how compounding works using our compound calculator.
If you want to invest your savings to accelerate your journey towards a home deposit, you need to be prepared to do it for 3 or more years.
Less than this and the risk of losing money is too high. It’s also not long enough to see the effects of the compound returns.
Saving for a house deposit can feel like a long slog but your efforts will be worth it.
There is no guaranteed way of immediately growing your savings, but smart investing could help you reach your house deposit milestone faster. Remember the tortoise wins the race.
Avoid random stock picking
Shares have provided higher returns over the long-run, but there is also more risk involved with investing than a simple savings account.
A random selection of shares has no guaranteed returns, unlike savings accounts and term deposits.
When you invest you need to diversify so that you have a wide range of investments from different industries, sectors, countries and asset types.
ETFs are the best way to diversify your investments
There are many options available for those wanting to invest, including ETFs (Exchange Traded Funds).
ETFs hold all the companies on an index, instead of buying one or two companies on the ASX (Australian Stock Exchange) like Myer or Telstra. They buy a small amount of each company on the ASX index.
ETFs also let you access lots of different investments such as global shares, emerging markets, bonds and gold.
The great thing about them is they solve the problem of trying to guess which companies to invest in, so you don’t need to worry about the time and effort it takes to pick stocks.
Use technology to solve the ‘how do I invest?’ problem
Most people aren’t interested in becoming an investment expert. That’s why there’s always been a big demand for personalised investment advice and having someone else look after your investments for you. For a long time these sorts of services have come at a premium cost.
However, in the last 6 years technology has allowed new online investment companies to provide professional and personalised investment services for much lower costs.
These online investment companies have established themselves in Australia. They are changing how people invest their money and have democratised investing for many Australians.
An online investment adviser like Stockspot does the work for you by investing on your behalf in a portfolio of ETFs that matches your financial goals (like saving for a house deposit), ability to take risk and how long you want to invest for.
Pay low fees when you invest
The aim when you apply for a mortgage is to get the lowest interest rate possible, so you pay less to the bank.
It’s the same when you invest. Our golden rule for investing is keep your fees below 1%.
Brokerage costs, management fees and advice fees all eat into your investment returns. The more you pay, the less you get. Ultimately it will take you longer to save up for that home deposit, if your investment costs are high.
Stockspot is the most experienced of the online investment advice providers in Australia, with a track record of 5 years portfolio returns.
Our fees range from 0.66% – 0.39% a year and are all inclusive (yes that’s right – brokerage, management, advice, rebalancing, the works).