How to save yourself

Home Update Newsletter: Issue 4 – August 2010

Author: Bina Brown
Publication: The Australian and The Australian Financial Review

Strategies to enter the property game

Despite rising rents and house prices, there are still ways to build a deposit.

With housing becoming less affordable, the question of whether to rent or buy is an ongoing dilemma for many. The biggest motive for people to buy their own home is to set themselves up financially for the future, according to the 2010 Mortgage Choice First Homebuyers Survey. About one-third of survey respondents saw more benefit in property investments than in the sharemarket.

But the survey also found that a further 2 percentage point rise in interest rates would see more than one-quarter of Australians who are looking to buy their first home in the next two years give up on the purchase.

Unfortunately, there is a link between people finding it harder to afford to buy property and higher rents, according to property research group Residex.

If demand for property falls because people can't afford it, there is less likelihood of strong capital growth. Without the prospect of capital growth, investors are reluctant to buy property. If there is a shortage in the number of houses or units available to rent, rents rise.

A financial planner with Strategy First Financial Planning, Patrick Anwandter, says anyone concerned about rising rents could try to negotiate a longer tenancy period.

"If you have been living in a place that really suits your needs - financial and personal - you can seek to lock in a tenancy for, say, four years, which can coincide with the accumulation of a deposit," he says.

Agreeing on rent increases could be a win-win situation. The tenant will have a stable rental period; the owner will have a stable tenant with no vacancies, known rental increases and a tenant who is more likely to treat the property as their home.

Rising rents in many capital cities and relatively low and competitive interest rates mean that now could be a good time to buy.

"If rents are between $600 to $1000 a week then, on those sorts of figures, you would be able to borrow up to $500,000," says the chief executive at Teachers Credit Union, Steve James. People who need to save a deposit could use a first home saver account to accelerate their saving.

These accounts are offered by several financial institutions. To qualify, a first home buyer must be aged between 18 and 65 and make personal after-tax contributions of at least $1000 a year over four financial years.

Savings are taxed at 15 per cent a year but the lender pays that, and the government will contribute 17 per cent on the first $5000 of the contributions that you make each year.

You can save up to $75,000 and when it comes time to take out the money to buy or build a first home it will be tax-free. "You can't touch the money and the government is helping with tax breaks and high interest rates," James says.

There are downsides, however. If you decide not to buy, your money can only be transferred to your superannuation fund, which you can't access until you retire.

Anwandter's advice for younger people is to build as big a deposit as possible. This could mean avoiding mortgage insurance and making fewer repayments.

Anwandter says one strategy for saving is to work out the type of house you want to buy and invest the difference between the rent you are paying and what you would have to pay on a mortgage.

Older people renting through circumstances such as a divorce could look at using superannuation to build up capital in a tax-favourable environment, which can then be drawn down in retirement and used to buy a property.

CASESTUDY

MIA ROSE always thought she would one day buy her own place. To make it happen in Sydney was like a "dream" for the community health promoter.

"I have been living in shared rental places since I left home at 18," the 32-year-old says. "It was the stress of strangers moving in every time someone moved out and two break-ins at the last house I was renting that finally triggered me to think I really have to move.

"To rent a one-bedroom place in the area where I wanted to live was really expensive, so I decided to find out from my bank, the Teachers Credit Union, what I could afford to buy and I found out they would lend me enough to buy something."

Mia says that to save a decent deposit on top of the first home-buyer grant, she had to make sacrifices but it was something she was prepared to do.

"It wasn't easy. I had to scrimp and save and to make what I thought was always a dream happen was great," she says.

TO BUY OR RENT?

RENT

Pros

• No debt burden of a big mortgage

• Rent is usually cheaper than repaying a mortgage

• Lower costs overall

• Can often rent a better place than you could afford to buy

Cons

• Rent money can be "dead money"

• Lease insecurity

• May have to share with strangers