The cost of a median house in Australia has risen by over 40% over the last 5 years, and that is frustrating news for anyone saving to buy their first home.
It is harder than ever to save a large enough deposit to get approved for a home loan, let alone a 20% deposit where you can get a better home loan deal and avoid paying Lenders Mortgage Insurance (LMI).
Houses are expensive: Here’s 3 things you can do about it
Despite what some old white men will tell you, cutting back on your smashed avo toast budget probably won’t get you there.
...but here are 3 things that can help:
1) Know your goal numbers and have a plan
A good starting point is to work out the size of the deposit you’ll need, given the amount you’d like to spend on a house.
Bank Australia have a calculator that can help you work out what you can afford given your income.
Once you’ve got a house price in mind, you should set your savings goal as at least a 10% deposit as most lenders won’t approve your loan application with a deposit any less than that, but preferably 20% as this will enable you to get a better home loan deal, and avoid paying costly Lenders Mortgage Insurance (LMI).
2) Get a good home loan deal, and avoid the big 4 banks
Not only are the big 4 banks huge investors in fossil fuels, their loans are typically more expensive than other alternatives.
3) Take advantage of the new government scheme
Finance minister Scott Morrison claimed on budget night that the new First Home Super Saver Scheme could help you save for a home 30% faster.
The Government’s new First Home Super Saver Scheme: What you need to know
Ahead of the recent budget announcement, there was a lot of anticipation about what the government would do to address housing affordability. Unfortunately, the answer was ‘not that much’, but the new super saver scheme at least could provide some help for people on the home deposit savings treadmill.
How does it work?
Put simply, the scheme allows you to make voluntary contributions to your super, and then get them out later when you’re ready to buy your first home. But there are lots of details to be wary of which we’ll explain below.
What’s good about it?
- Large tax saving - There could be a large tax saving allowing you to have more money ready for your deposit
- Better ‘return’ than high-interest savings account - The amount you can take out is based on what you put in, plus a ‘deemed rate’ (rather than actual returns), and that ‘deemed rate’ is currently quite a bit more than you can get through a high-interest savings account
- Partner double-up - Both you and your partner can take advantage of the scheme, doubling the possible amount you can save through the scheme if you plan to buy a house together
- Super boost - If your super returns are good, this won’t affect the amount you can take out, but it will mean that your super balance gets a boost
What are some of the things to be careful of?
- Only voluntary contributions - The scheme doesn’t let you take out your super generally; only the money you’ve put in voluntarily plus a ‘deemed rate’
- Yearly scheme maximum - The maximum you can put in per year under the scheme is $15,000 (but if you’ve got a partner you could put $15,000 into each of your super accounts)
- Total scheme maximum - The total maximum contributions under the scheme is $30,000.
- Yearly total super maximum - The maximum total super contributions per year is currently $25,000 including the contributions your employer puts in, so for example, someone with a $110K salary whose employer pays the standard 9.5% would get $10,450 in employer super contributions so would only have $14,550 left under the total $25,000 cap that you could contribute under the super saver scheme.
- Money could get stuck in super - If you end up not buying a house, or for example, meet someone special who already owns a house and move in with them, the money will need to stay in super until you retire. You can’t use the money to purchase a second house - it’s strictly for first homes.
How do returns and the ‘deemed rate’ work?
The returns that your super generates will not affect the amount you’ll be able to take out when you’re ready to purchase a home.
The amount you can take out will be based on what you put in, plus a ‘deemed rate of return’, which is currently more than 4.5%.
That’s more than you can currently get through a high-interest savings account (like ING Direct and uBank offer) so you could grow your available deposit faster than if it was in those alternatives (and that is on top of the tax advantages).
How much difference will it make?
Here is a scenario where a couple save over $12,000 more by using the scheme:
Sarah earns $60,000 a year and wants to buy her first home. Using salary sacrifice, she annually directs $10,000 of pre-tax income into her superannuation account, increasing her balance by $8,500 after the contributions tax has been paid by her fund. After three years, she is able to withdraw $27,380 of contributions and deemed earnings on those contributions. Her withdrawal is taxed at her marginal rate (including Medicare levy) less a 30 per cent offset. After paying $1,620 of withdrawal tax she has $25,760 that she can use for her deposit. Sarah has saved around $6,240 more for a deposit than if she had saved in a standard deposit account. Sarah’s partner James has the same income and also salary sacrifices $10,000 annually to superannuation over the same period. Together they have $51,520 that they can put towards a deposit, $12,480 more than if they had saved in a standard deposit account.
How do you get started?
The scheme is administered by the ATO, but you don’t need to tell them you plan to take part in the scheme, you can just start making personal super contributions to a super fund.
An easy way to take advantage of the scheme is to tell your employer that you’d like to salary sacrifice part of your salary into your super.
When can you start putting money in under the scheme?
You can make a contribution from 1 July 2017.
When is the earliest you can you get money out?
Withdrawals will be allowed from 1 July 2018.
How will I know how much I’ve got saved?
With Future Super, we will show our members how much they have saved that is eligible for the scheme within our member portal.
You can set up a super account with Future Super in 2 minutes, and we can help find your other super and combine it into your Future Super account.
Choosing a home loan: The problem with the Big 4 banks
Ready to choose a home loan? There are at least two great reasons to consider avoiding the big banks.
Firstly, the big 4 are huge lenders to the fossil fuel industry.
According to Market Forces, these are the latest amounts:
- Commonwealth Bank - $20.6 Billion
- ANZ - $23.4 Billion
- Westpac - $11.6 Billion
- NAB - $14.9 Billion
If that’s not enough of a reason to avoid the big banks, you can probably get a better deal from other lenders.
Bank Australia is a bank that has not and will not make any loan to the fossil fuel industry, and at the time of writing you could get a rate of 3.86% p.a. (3.90% p.a. comparison rate)^.
5 steps to get started
Saving for a home deposit isn’t easy, but with the right plan and discipline you could be collecting the keys to your new home sooner rather than later.
Let’s recap with these 5 steps to get started:
- Decide on your deposit savings goal - A 10% deposit is the bare minimum you’ll want to aim for, but 20% will help you get a better home loan deal
- Work out your savings plan - Work out how much you’ll save each month to get your to your goal. Note that even if you use the new super scheme, you’ll probably also need to save money outside of the scheme to reach your goal
- Get your super account sorted - If you decide the new super saver scheme is for you, you may wish to switch to a super fund that will help you track your savings like Future Super
- Arrange salary sacrifice - The easiest way to make super contributions under the new scheme is by telling your employer you wish to salary sacrifice into your super account
- Track your progress - Future Super will make tracking amounts saved within your super account easy by showing the relevant info in your member portal
Good luck! :)