View All Insights

What Should I Do With my Money While Saving for a House Deposit

What Should I Do With my Money While Saving for a House Deposit

Saving up to buy a house is by far the largest expense the majority of people will ever pay in their lifetime.

For most, saving up for a big enough deposit will take several years to achieve.

When buying a house, most people will save a deposit and then apply for a mortgage to cover the rest. Deposits can be as little as a few percent up to the entire cost of the house. You have to have a deposit to buy your house but the size of it is a matter of preference. Banks will be more favorable in lending with a higher deposit size.

When banks pay you very little or no interest, your money loses value against inflation. Are you going to let your deposit sit there losing value or should you put it to work and invest it?

The short answer is you shouldn't touch it.

On one hand you could cut down the time and amount you need to save from investment returns.

Chart showing just saving verses using investments for house deposit
Saving for a deposit VS Investing savings. If the investment had positive returns, your required deposit would be less.

But, you could multiply the time and amount needed to save due to losses.

YOLO! I Want to Invest My House Deposit for Gains.

There is nothing worse than seeing a meteoric rise in the markets and you're sitting on the sideline.

In some instances you may be ok to invest your deposit if you are flexible on timeframes and do not mind if you miss out. That is, if you don't mind waiting several years for your investment to return a profit (if at all). Investments like the stock market and housing markets generally go up and down over time. There are cycles where some years you will be better off and other years you will be worse off.

Over the last 30 years, Australia and American shares had 6 years of negative returns and 24 positive.

Chart showing Australia and America Stock returns over 30 years

During the 2002-2003 and 2008-2009 periods, there were 2 consecutive years of heavy losses.

So should you invest your house deposit for the chance to make profits?

If you invest your deposit then you risk needing to start again if your investments fail.

Work out how much your house deposit needs to be and how long it will take you to save. This will give you an idea of the possible investment timeframe before having to sell. If your timeframe is long enough to see a return investing then you need to consider your tolerance to risk. Every investment type comes with a certain level of risk. Usually the higher the risk, the higher the return will be. But that also means the higher chance you will not see a return in the end.

Lets say you were to invest in Crypto then you could see massive returns. If you look at the return over a long period of time you can see there are euphoric highs and devastating lows.

Chart showing bitcoin price rise over the last 4 years

These extreme swings in volatility can happen in a single day. A difference of $1309 or 4% between open and close on an average day.

Chart showing bitcoin price volatility in one day

If crypto is too much of a risk for you and you want to go a safer route then investing in the stock market can be a safer bet. Though there are still plenty of risks and you can still lose all your money if you are not careful.

An exchange traded fund (ETF) is a fund that invests in tens or hundreds of stocks. What stocks it invest in depends on the purpose of the ETF.

To minimise the risk of losing everything, investing into an ETF can hedge against a single stock losing its value. You will likely not see as high a return as investing into select single stocks but your risk gets spread this way.

The Vanguard Australian shares (VAS) ETF tracks the S&P/ASX top 300 shares.

Chart showing a breakdown of portfolio holdings

The good thing about index based ETF's is their nature of tracking companies. When one company loses value, another will take its place. This means that the loss of that company only makes up a tiny fraction of the return. And the chance of every single company going bankrupt is very unlikely. They are the largest companies for a reason - because they make money.

Looking at the VAS ETF again, we can see since the start of the fund that the return has been 9.72% as of 30th June 2021

Chart showing total returns of VAS sine inception
VAS total returns since inception. Its returns are inline with the index.

Because it aims to track the index, the returns will be almost identical to that of the index. You wont see huge increases in its share price like you would with crypto.

But we have to remember that we are not investing in the past, we are investing in the future. You should not make your decisions on what the fund has achieved in past performance.

Finally, if you have to sell your investments to make up the rest of the deposit, you may have to pay capital gains tax. This will reduce the total amount you have available.

So should you invest your house deposit on the stock market?

Well there has been periods of heavy losses that has lasted many years. Only you can determine if your timeframe to saving for your deposit is greater than the potential time to see positive stock market returns. Stocks are medium to long term investments that are generally held for several years.

If the thought of losing your deposit makes you uncomfortable then stick with the following safer ways to maximise your house deposit.

I Want to Safely Maximise My House Deposit

Investing with money you can't afford to lose is not for everyone. Any sane person knows that saving for a house deposit takes time and dedication. That is the sure-fire way to get to your house deposit. The money you save up is not something you want to lose.

There can be a long time between starting out your saving journey and buying you house. Here are a couple of tips you can use to maximise the amount of money you will have for the deposit. These following tips are less risky so the return is less but should still consider them. Every little positive bit you can do to get you closer to owning your house is a worthwhile endeavour.

Tip 1: First home Super Saver Scheme (FHSSS)

The Australian Government has created a scheme to help you buy your first home. The scheme involves you salary sacrificing into your Superannuation account. You can then withdraw the money you sacrificed to use towards your deposit.

Example of how FHSSS works
The First Home Super Saver Scheme (FHSSS) allows you to grow your deposit faster

The benefit of doing this is it reduces your taxable income. This means that for the amount you sacrifice into your Super you usually only pay 15% of tax. That sacrificed amount deducts from your personal taxable income. So you pay less tax for every dollar you salary sacrifice.

There are a few things to note about doing this though.

  • You can salary sacrifice up to $15,000 per year into your super for use in the scheme.
  • You can only withdraw money you have salary sacrificed. You cannot take money out deposited by your employer contribution.
  • You can withdraw up to $30,000 (Increasing to $50,000 on 1 July 2022). You would need to sacrifice for approximately 3 years and 4 months to be able to take full advantage of the scheme.
  • You need to submit the request to use the funds before you have applied for the house. You need to use the funds within a year of getting approved.
  • You can only use this scheme to buy your first home.

Read more about the FHSS scheme on the Australian Taxation Office website. Use the self assessment too to see if you're eligible.

Tip 2: Use the Highest Interest Savings Account You Can

You should put your deposit into one of these highest interest savings accounts.

The amount paid to you in interest is likely only going to be negligible at current interest rate levels. Having said that, if your bank pays 1.5% interest then that is $1000 a year (assuming you have roughly a 65k balance).

Some banks have higher interest incentives for younger people under an age bracket. Check the savings accounts with the highest interest to see if you can get more interest paid to you.

Tip 3: Do You Need a 20% Deposit or Can You Get a House for Less?

A general rule is to save 20% of the price so that you aren't required to pay lenders mortgage insurance (LMI). LMI is a compulsory insurance that gets added onto your home loan. It is a way for banks to protect themselves if you cannot pay for the loan. LMI is not included if your deposit is higher than 20% of the loan value.

Just because you're told that you need to have a 20% deposit doesn't mean that is the only way. Depending on your circumstances, banks may lend to you with a much smaller deposit amount.

Other factors you have to consider are:

  • How long you will be saving the deposit for.
  • Start growing equity in your home sooner.
  • What might the expected house price value be if you were to wait years to save a 20% deposit.
  • What your current housing (rental or mortgage) costs are.

You may be able to have a smaller upfront deposit and not have to pay lenders mortgage insurance. Someone like a family member can offer to go guarantor on your loan. They agree to offer their own property as security so you can get the loan. Doing so is risky for the guarantor. If you are unable to pay your loan then they run the risk of losing their house.

Tip 4: Save with a partner/spouse

This last tip is very obvious. Saving for a house deposit with a partner/spouse is a quicker way to buy. You are able to save less because they are contributing to it too.

Make sure you trust they will be around and can service the loan though. Otherwise you may default if you are unable to service the loan yourself. Losing your house is a big mistake.

Conclusion

The general rule is if you are saving for a deposit and it takes a few years, you let the money sit there in your bank account. This is because you don't know what will happen over the next couple of years.

If any investment you make with that money goes down then you may have to save even more. If it was a really bad investment then you may lose the deposit and have to start again.

So if you want to play it safe, save hard, stick to the plan and you will have your deposit saved before you know it.

Do you need the tools to enable you to make the right financial decisions when saving for your deposit? Fichest may be able to help you.