Saving For A House Deposit?
Saving For A House Deposit – Should You Invest Your House Deposit Savings?
Saving a deposit for a house is not easy. But with interest rates still at an unusually low level, despite the increase today, Sydney house prices the way they are, and the high cost of renting, it seems to get tougher by the month. So it’s not surprising that people are looking for ways to speed the process up.
Let’s take a look at the pros and cons of investing the money you are saving for a deposit through a Mini Case Study.
Simon & Heather
Simon and Heather have been saving for a while and have a decent start on a deposit sitting in a couple of term deposits. Even so, it will be several more years before they have enough to think about actually buying a home and they feel frustrated at how long it’s taking.
They’ve already exhausted all the usual avenues for increasing their savings. Tightening their financial belts. Working two jobs. Living in a share house to save on rent. What else can they do? When they look at the low rate of interest their savings are attracting they wonder if those savings can be made to work harder by investing them in assets that have the potential to deliver higher returns.
The Old Risk & Return Equation
The first thing Simon and Heather need to recognise is that moving their money from term deposits and savings accounts into higher return products comes with increased risk. Shares, even so-called blue-chip shares, can fluctuate significantly in value.
On the positive side, over the long term, and by that we mean five years or more, a well-diversified share portfolio is likely to produce significantly better returns than cash deposits.
You will notice we said ‘well-diversified share portfolio’. Because diversification is vital in spreading risk. This means choosing a range of different investment classes. So Simon and Heather should consider other high-performing products, not just shares. This might mean property, via managed funds, and other forms of fixed interest investments.
With protecting their precious nest-egg as their primary objective, Simon and Heather should avoid speculative investments, or investments that are considered long-term or illiquid, like some unlisted property trusts, because if their investments are successful they may want access to their savings sooner than they expect.
They should also be aware of how their investment income will be taxed, both in their annual tax return, and as a capital gain on divestment of the asset. They should seek the advice of a good financial planner about which investments make the most sense for them, taking their overall position into account.
Keep Your Eye on the Prize
Saving for a house deposit requires a great deal of discipline. Keeping your eye on the ultimate prize, a home of your own, should be the guiding principle when considering any level of investment risk. There will always be the temptation to invest more of your nest egg when the market is up, but remember, what goes up can come down.
If you would like to supercharge saving a deposit for your home, without putting your goal at risk, Manly Financial Services have the knowledge and experience to help set you on the right course. Call us for a chat on (02) 9976 3388 or contact us here.