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With interest rates so low, how do first home buyers save for a deposit?

Mature couple looking out of window into the sun

With saving deposits at horrifically low interest rates, how savers can cope with term deposit rates under 2 per cent?

And the Reserve Bank seems poised to cut interest rates again, possibly as early as Melbourne Cup Day. That said, I suspect the Bank will wait until December. If there isn’t an improvement in economic data and the current Trump trade deal isn’t signed, then another cut is on the cards.

Where else savers might put their money to get better returns? We used to get rates of 5 per cent, which actually helped young people build a deposit for a house, save for a car or a holiday. The current 1.45 per cent at the CBA for socking your savings away for a year just won’t cut it.

As a consequence, savers have to go up the risk curve and go into more risky investments/saving vehicles, such as mortgage trusts, property trusts and income funds but these can take your capital or your savings down, if the stock market crashes.

Funds like these not listed on stock market can get into trouble in a recession, so they bring new problems for savers that don’t happen when your money is in a government guaranteed term deposit at a bank.

There are also bond funds, which are relatively safe, but the returns are down to 2-3 per cent since interest rates worldwide have fallen. And under strange economic conditions, you can lose money in a bond fund as well.

So what can a person trying to build up a deposit for a home loan do?

For starters, the First Home Buyer Super Saver Scheme (FHSS) should be considered. I must admit I’d forgotten this useful idea until I started to wrack my brain to come up with decent ways to grow someone’s savings.

Here’s how you qualify:

  • You can’t have owned a property in Australia before

  • You have to be at least 18 years of age

  • You intend to live in the home for at least six months of the first 12 months of ownership

  • And you’ve never used the FHSS before

  • You have to be putting into super via work, which means you can be up to 74 years of age.

The scheme lets you make voluntary contributions i.e. savings into your super fund and you can do this using salary sacrifice. Any amount you put in over and above what your employer puts into your super fund can be used to build up a deposit, which you will be able to withdraw from your super fund (for a deposit).

You can save up to $15,000 a year above your compulsory super contribution. The most you can pull out for a deposit is $30,000 but a couple would get access to $60,000. That said, you are restricted by your concessional super contribution cap, which is $25,000 a year.

If you have $15,000 put into super by your boss, then you could only put in $10,000 a year as a concessional contribution. However, you could put $5,000 in from your own savings as a non-concessional contribution, which would mean you’d be able to get the $15,000 maximum a year into your fund.

It all sound great because good super funds average 7 per cent returns or better. But, once again, super funds can be affected by a big crash or stock market sell off.

Clearly, if you want to know more, use this search engine and look up FHSS. But remember, when you venture away from Government-guaranteed bank deposits, you can get higher returns but your savings can shrink if there are stock market or economic problems.

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