OBN Financial Services Blog

Saving for a house? How to get your deposit together faster

The reduction in salaries over the past few years as well as the new mortgage rules mean that the task of getting a deposit for a house together is significantly more challenging than it used to be.

Given lower incomes due to the recession, a higher than previous tax burden as well as high rents in urban areas due to lack of supply, we estimate that even the most determined of savers would find it challenging to save €500 per month or €1,000 for a couple.

With growing house prices many buyers in urban areas will find themselves having to pay €300,000 to €350,000 to get on the property market. Prior to the introduction of the new mortgage rules in January the typical deposit required for a €350,000 purchase was €28,000 – it is now almost €44,000. When legal fees, stamp duty and basic furnishing costs are included, a buyer would need to have around €60,000 in their back pocket before they can even approach a Bank seeking a mortgage. This is without taking account of emergency money which it is recommended everyone should hold to meet unforeseen expenses, so let’s round it to €70,000 in total.

Given all of the above, a typical couple both on the average wage who are saving to purchase their first house would be doing well to achieve this in around six years. That’s a best case scenario assuming no rainy days, no period of unemployment or reduction in income due to sickness. In reality we’re probably talking about seven years.

So the job of saving the deposit for your first house has changed from being a three to four year plan to being a seven year plan. Not good, but it does open up some options which haven’t been explored very much previously.

Historically most house deposit savers would have placed their savings in a regular deposit account or an instalment savings account and maybe moved chunks into a fixed term deposit at regular intervals to get the benefit of higher fixed rates, however given the current low level of interest rates even fixed rates aren’t very attractive. Unit linked multi asset funds* weren’t favoured previously for people who were trying to get a deposit together as the investment window was too short. Investment in unit linked funds is generally only recommended where the funds are not required for five to seven years, as a term this long would be required in order to have a reasonable expectation of a rise in fund values. Now that the task of saving a deposit is going to take five to seven years anyway, this opens up the possibility of investing in these funds in order to gain a better return.

When saving using a normal deposit account DIRT tax is deducted from your interest before it is applied. However, if you save using an investment fund, although tax is payable on gains, it in only taken on exit; this is known as gross roll up and it means that your investment grows quicker. Using this method you could reach your target deposit six months to a year earlier than by using deposits. This assumes a gain of 6% p.a. on the investment fund chosen.

It’s only natural that deposit savers should explore this as their task is being made even more difficult than it already is by current low interest rates. Ironically the low interest rates which hindered them in saving their house deposit won’t help them with their mortgage as our bailed out mortgage Banks aren’t passing on the savings.

A second positive to this method of saving is that saving via a product which is invested in a multi asset fund will to some extent act as a natural hedge against rising house prices. When you are saving for your first house, seeing house prices rise can be soul destroying – you’re running to stand still. A multi asset fund which is partially invested in property is likely to grow in line with the economy and property prices. Conversely, if it doesn’t perform well it is likely that the housing market isn’t booming either. The property which multi asset funds invest in is commercial rather than residential but there is a correlation between the two, as we saw with the reduction in property values in 2008 and the prices rises in recent years.

If you think that investment in a unit linked multi asset fund could be an option for you, contact the writer on 086 606 5008, using the contact form below, or by email to eoghan@obn.ie.

* A unit-linked fund is an investment plan, which combines your money with money from other investors and buys units in a fund. The number of units you get depends on how much you invest and the price of the units at the time you buy. Multi asset means the fund is invested in a combination of equities, property, bonds, cash and alternative investments. This diversification reduces the risk of a fall in the value of units.

Warning: The value of your investment may go down as well as up.

Warning: If you invest in this product you may lose some or all of the money you invest.

Comments in this blog are general in nature and should not be taken as financial advice as no assessment has been undertaken in relation to your financial situation or objectives.

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