How to save for your deposit with low interest rates
Low interest rates may be great when you have a mortgage, but they make it difficult to save for the deposit in the first place. Read more in our First Home Buyers Bible.
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First-home savers are struggling to build deposits as most savings account interest rates sink below 1.5 per cent, but chasing higher returns on the sharemarket is not the solution.
Despite shares in the big banks and other companies paying dividends three or four times higher than bank deposits, finance specialists warn that the risk of stocks is too great for anyone who might want their money back within a few years.
New figures by RateCity show that record low interest rates have resulted in the major banks’ standard savings accounts paying customers interest of 0.15 per cent or lower after a three-to-five month promotional period.
It puts pressure on savers to constantly shop around for a good deal and potentially switch banks to secure the best rates.
RateCity research director Sally Tindall said savings account interest rates were likely
to remain “incredibly low for a long time”.
“We have seen savings account rates plummet over the past few months as the Reserve Bank of Australia has taken the axe to the official cash rate,” she said.
“Particularly where they have an introductory rate for a few months and then it falls away to a base rate of next to nothing.”
Ms Tindall said the highest savings account interest rates on the market often required people to jump through hoops such as making minimum deposits or no monthly withdrawals.
“If you shop around you can get a rate above 2 per cent,” she said.
RateCity’s data shows maximum rates are now around 2.5 per cent, following 0.5 per cent of official rate cuts in June and July.
“A few months ago, the highest rates were around 3 per cent,” Ms Tindall said.
“The concern is that people will look for riskier options but it’s important to weight up those risks before diving in.”
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Shares, peer-to-peer lending and property investments are among the riskier options, and Ms Tindall said a safer move was to focus on saving more yourself.
“And do not sweat about buying your dream home in the perfect location first up,” she said. “Think of it as a stepping stone.”
Catapult Wealth director Tony Catt said sharemarkets were still trading near record highs, despite rising global uncertainty.
Many people have switched money from cash to shares to chase high dividends, which now average around 4.7 per cent, or 6.7 per cent once tax benefits are added.
“The return doesn’t outweigh the risk at these levels,” Mr Catt said.
“But if the market has a 20 per cent dip tomorrow, buying shares in depressed circumstances might have a different risk-return argument.”
Mr Catt said his firm was directing younger savers and investors towards slightly lower-risk assets such as infrastructure, property funds and bond funds, which should do better in a low-interest-rate environment.
“There’s a lot of uncertainty at the moment — there’s global tensions around Brexit, the Hong Kong situation and the China-US trade war. There are lots of issues.”
Savers who were not looking to access their money for at least five years could consider shares and the strong dividend income that many stocks paid, Mr Catt said.
“In a five-to-seven-year time frame, the risk of capital loss is something like 0.5 per cent historically,” he said.
HOW WE SAVED FOR OUR HOME
By Sophie Elsworth
Christopher Massillamany, 31, and his wife Roshni, 28, recently purchased the apartment they were renting.
The pair were paying $545 per week in rent and were on the hunt for a two-bedroom, two-bathroom unit around Enfield in Sydney’s inner west when it turned out they could buy without having to move.
The couple met with a mortgage broker in January last year to see what their borrowing capacity would enable them to get as loan.
“We wanted to clarify what our mortgage repayments would be when we bought a place; that they would be similar to our rental repayments so we weren’t stretching ourselves too much,” Mr Massillamany said.
The purchased their home off the market after continuously asking their property manager if the owner would sell.
The pair both work full-time — Mr Massillamany in compliance and his wife in audiology and they knuckled down hard to save.
“From the moment we got married we agreed to save a good portion of our salary, we saved about $1000 each per month,” Mr Massillamany said.
“For the deposit we had our savings and we used money from wedding gifts and
some money from our parents.”
They pooled together $95,000 to buy their $645,000 property and said they were pleased to now be paying off their own home.
Mrs Massillamany said the location was one of the
main factors they focused on when
buying property.
PURCHASE: Two-bedroom, two-bathroom apartment $645,000
FIRST-HOME BUYER: Qualified for First Home Owners Grant
FINANCES: Saved a 15 per cent deposit
$10k interest free to buy a house
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Surprising rise of the over-35 first homebuyer
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