Buying the first home starts with raising enough funds for a home loan deposit. While everyone understands the need to save for at least 10% to 20% of the purchase price, not many know exactly how to accumulate that amount of money.
Saving money to buy a house requires some sort of planning and strategy. Here are some useful tips for raising home loan deposits.
Open a First Home Saver Account
First time home buyers in Australia should open a First Home Saver Account, a tax effective way to save for a house deposit. Basically, the first $5000 of individual contribution made each year to the account will see the government contributing 17% of that amount. This is much higher than any interest rate in savings accounts or fixed term deposits.
The First Home Saver Account should not be confused with the First Home Owner Grant, another government incentive to help Australians purchase their first homes. Those eligible for this grant will receive a payment of up to $7000 and possibly other bonuses, depending on which state the property is located in. Make use of both these incentives to raise a home deposit.
Plan Investment and Saving Strategies Based on Timeline
Saving money to buy a house is also largely tied to how much time a home buyer has before he aims to put down a deposit, according to David Koch, Australia’s leading finance journalist and author of Kochie’s Guide to Keeping it Real, hence the importance to plan investment and saving strategies based on timeline.
“If you plan to buy a house in five years or more the best option could be investing in the share market. Share returns outperform all other investment classes over the long term,” Koch explains. He also suggests those with little knowledge in share or stock investment and limited funds to invest in managed funds. Money invested in managed funds is handled by professional fund managers who diversify the investment into several stocks, maximizing their returns while protecting the investments.
Those planning to buy a house in three to five years may need to invest their money across different asset classes instead of just on shares alone. This is because the share market is extremely volatile and investors may not have enough time to recover from their loss if the stock market takes a tumble suddenly. Koch suggests investing in a combination of local and international shares, fixed interest, property and cash.
Aiming to buy the first home in less than three years? Avoid investing in shares, says market analyst David Ebrahimzadeh. Instead, save money in high interest bank accounts and fixed term deposits as the capital is guaranteed and the returns are modest and secure.
Save and Invest While Renting
Is getting a big home loan with a small house deposit better than continuing paying rent while trying to raise a bigger deposit? Not necessarily, says Koch. He reasons that those who rent and then wisely invest the difference between the rent and what they would have to pay in mortgage repayment can often raise more funds than by borrowing heavily, for instance getting a low- or no-deposit home loan. That’s because money used to pay the high interest of home loans in the long run is usually much more than money used to pay rent.
Those in the process of saving money to buy a house should take advantage of government incentives such as the First Home Saver Account and the First Home Owner Grant. Another strategy for raising home loan deposits is to plan investment and saving strategies according to timeline. It’s also advisable to invest wisely while renting to save for a house deposit instead of borrowing heavily for a home loan in the hope of purchasing a home quickly.
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