Home Deposit Saving Plan On Track Or Off The Rails?

Sun Herald

Sunday October 16, 2005

Renee Barnes

He's young and saving hard, but is he on the right track, Renee Barnes asks.

JOE Sumegi is focused on saving for his future. The 21-year-old journalist deposits $100 each week into a property-based managed fund, which is now valued at about $6000.

"It's been good, a way of enforcing saving," says Joe of the fund. But now he is considering diversifying his investing. He prefers managed funds because he views direct share investment as a more hands-on, higher-risk alternative. But he is not risk averse, viewing his investments as long term, so he is comfortable with a higher level of risk.

"It is a long-term investment and I am quite young, so I am comfortable with riskier investments," he says.

Eventually Joe wants to use his investment in the managed fund to "accelerate" his saving for a house deposit. He has two high-interest yielding, internet-based accounts. One is for his personal savings, into which he transfers all of his salary.

"I also have a credit card that has 55 days interest free, which is useful because I leave my salary in the interest-bearing account, and then pay the balance owing at the end of the month."

The other high-interest account is shared with his girlfriend, with both depositing $100 into it each week. So far they have accumulated $3900. Joe would like to buy an apartment in Sydney with his girlfriend, who earns about $25,000 per year. He knows that he is able to get a loan with only a 5 per cent deposit but would be happier saving a larger percentage.

"I don't want to be borrowing beyond my means and putting myself in a bad position in the long run."

How much should Joe look at saving to purchase a $350,000 to $400,000 apartment in Sydney? Will he be able to service a mortgage this size? He is also concerned about the timing of buying house, because he is unsure about how the housing market is going.

Another issue of concern is insurance. Joe only has life insurance associated with his superannuation, but he is unsure of what amount this is for. He hasn't got any dependants and at age 21, what insurance cover should he be considering?

If you would like to participate in Investor Overhaul and receive free financial advice, send an email with your location and a brief explanation of your financial situation to investor@fairfax.com.au.

FINANCIAL SNAPSHOT

Name: Joe Sumegi.

Age: 21.

Occupation: Journalist.

Salary: $36,576.

>Assets

Property: N/A.

Super: $7500.

Investments: $6000 in managed funds.

Cash in the bank: $2000 in personal account and $3900 in joint account with girlfriend.

>The average week

After-tax income: $540.

Expenses

Rent: N/A, lives with parents.

Living expenses: $200.

Other: $200 ($100 in managed fund and $100 in joint account).

Total: $400.

Insurance

Some life insurance through superannuation but not sure how much.

With your goal to buy a unit, invest for five years to earn deposit

Sarah Robinson, Maquarie: To diversify or to not diversify?

THE key for you, Joe, is to shift your savings to Australian and international shares for diversification purposes, and leave the money in your property fund for the long term.

Rather than try to pick individual stocks, your best option is to invest via a growth managed fund.

In keeping with your goal to save a better home deposit, you should be looking to invest for five years, which is long enough to earn a reasonable return but also frees up cash when you're ready to buy.

To maximise the amount going into the fund, you should stop putting $100 a week into the cash account. Instead, it and the $100 that was going into your property fund should be directed into the growth managed fund. Increase the amount as your circumstances improve.

As your salary increases, you should try to stick to the same budget you have now and put the extra money into your growth managed fund.

Obviously, if you leave home that will impact on your ability to save and you will need to review your savings and your outgoings to try to keep saving at least some money each week.

As your lifestyle and needs change, you will need to review your savings plan. Financially, Joe, you would also be wise to look at separating your savings from your girlfriend's. While motivating each other to keep saving is positive, if the money ever needed to be separated for any reason it could cause difficulties.

It would be better to keep saving independently; then, if you enter a mortgage together, having an exact contribution each to the deposit noted in a legal document would be beneficial.

Don't worry too much about the timing, just get the figures right

Kevin Bailey, Money Managers: When is it the correct time to buy a home?

THE decision to purchase a property is a major financial commitment and should be given due consideration. To avoid the additional upfront cost of mortgage insurance, Joe, you should save at least 20 per cent of the bank valuation of the property. A 20 per cent deposit on a $350,000 property is $70,000. Of course saving more will reduce your repayments.

The ability to service a loan depends on the size of the loan, interest rate, deposit saved and after-tax income. In addition there are costs such as stamp duty and legal expenses and, once moved in, further expenses such as rates or body corporate fees. It is important to account for all these expenses, but most important are increases in interest rates.

If you were to buy a property for $350,000 using a $70,000 deposit, a 30-year loan at today's rates will cost you about $1815 per month, leaving you only about $600 a month to meet all other expenses. Each 0.5 per cent rate rise will increase your repayments by about $100 per month

On this basis it is unlikely that you would qualify for a loan of this size and very unwise of you to over-commit yourself in this way.

Trying to time the purchase of a property for market peaks and troughs can be a risky business and you should try to avoid purchasing on this basis. Instead, you should concentrate on finding a property that you like and, more importantly, that is within your budget.

Prepare a list of desired features (such as location, close to transport/shops etc) to rule out inappropriate properties.

First you need to know why to insure; then you can know when

Paul Moran, Cameron Walshe: When is it time to consider insurance?

HI Joseph. It is incredibly heartening to hear someone so young with clear financial goals. What's more, you are implementing a very sound strategy to create wealth and financial security.

Separating your savings as you describe is by far the most efficient way. Too many people try to get by with a single bank account, which means they have ready access to all of their savings to spend. The only way to save is to put money for medium-term savings somewhere more difficult to get at.

There are three main reasons to consider taking out personal insurance policies.

First, life insurance is used to repay your debts so as not to burden your estate (remaining family). Since you have no debt there is no need yet for insurance to cover this.

Second, people with dependents (spouse and children) generally like to have some money available so they can maintain their lifestyles. Also not needed yet.

Finally, people often take out income-protection insurance to cover themselves against a long-term illness or injury. You have identified several financial goals, all of which require you to be able to earn an income. For single people on a reasonable income, this type of cover protects their lifestyle. It is even more important for breadwinners in a family.

One of the easiest and cheapest ways to get cover is through your employer's superannuation plan, which must offer at least a basic life insurance. Many offer well in excess of basic cover and some also provide salary continuance insurance. The insurance benefit offered by your super fund is a key feature to consider when choosing a fund.

© 2005 Sun Herald

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