One of the biggest challenges many young Australian’s face is the ability to save for a home deposit.
In some cases, people will turn to parents or even grandparents for a home deposit or to guarantee their loan.
More and more adult children are moving back in with their family to boost their savings, but not everyone has this option or wants to go down this path.
For people wanting to dip their toes into the property market getting some strategies and financial discipline for saving, expenses and budgeting is essential.
Sometimes instituting a savings plan for further investment, or using existing equity to create real wealth is a good place to start.
More people are turning to investing in property first to get ahead before buying their dream home.
This means that they aren’t constrained by location and can start with a lower property deposit.
Often they aren’t looking to buy in the neighbourhood they want to live in, so there is less emotion attached to the purchase.
From a cash flow perspective, it is more cost effective to rent the property they want to live in than to repay a mortgage on it.
How can a young couple build a 40 per cent deposit?
Let’s look at a young couple that is currently paying rent of $500 per week.
The home they are living in is valued at $800,000 so to buy a home similar with a loan worth $720,000 – assuming a 90 per cent loan to value ratio – weekly repayments would be $892.
Let’s say the couple can afford the repayment of $892 per week but continue to rent where they are.
The $392 weekly surplus cash flow – $20,384 per annum – could then be used for investment and boosting their savings and or equity.
Using part of their savings now for a deposit on an investment property will allow them greater financial freedom in the long run.
This client’s strategy includes purchasing an investment property for $500,000 with a 10 per cent deposit.
The investment provides an after-tax cash flow of approximately $10 per week based on their circumstances.
The couple now have $402 per week surplus cash flow plus equity growing in the investment to build towards a 40 per cent deposit on an owner occupied home.
With an assumed property growth rate of six percent per annum the equity would be approximately $215,000 after five years and $442,000 after 10 years.
Their ideal home will cost approximately $1 million in five years time, so with careful planning they’ll be able to move in with the confidence that they haven’t got a massive burden in their home loan and are improving the tax efficiency of their income.
When the time comes to buy the family home, the couple is comfortable that $750 per week is affordable for them.
Assuming a $1 million purchase using a 40 per cent deposit, principal and interest repayments are $743 per week.
There are many paths to owning a home.
The option of building a large deposit through capital gain on well-researched property is worth considering.