It’s never been easy to save the deposit for a home, but low rates make it even more difficult. For starters low rates drive up house prices, forcing homebuyers to come up with bigger deposit amounts. Then those low rates rob buyers of the ability to earn a decent, low risk return on their hard-earned savings. When the traditional savings vehicles of homebuyers – savings accounts and term deposits – offer only token rates of return, aspiring homebuyers start to ask themselves what can they do to build their deposit more quickly?
This is the situation that Ahmad and Layla find themselves in. They’ve made a solid start on saving a deposit, but calculate it will still be several years before they’ll be able to start bidding on a home.
They’ve explored the obvious options of course – spending less and saving more of their income, but there are only so many smashed avos on sourdough that can be foregone or extra jobs that can be worked. So what else can they do? Looking at the depressingly low rate they are earning on their existing savings, they wonder if those savings can be made to work harder by investing them in assets that have the potential to deliver more potential returns.
The first thing that Ahmad and Layla need to recognise is that any attempt to earn more than the cash rate comes with increased risk. Most people are aware, for example, that shares can fluctuate significantly in value, even from day to day. On the positive side, over the long term – five years and longer – a well-diversified share portfolio is likely to produce significantly better returns than cash. This doesn’t mean Ahmad and Layla should invest all of their current and ongoing savings into shares. Far from it. But these statistics make a good case for investing a portion of their savings in a broad mix of higher yielding assets. In addition to shares this may include property and various forms of fixed returns. However, protecting their fortune is a high priority.
Ahmad and Layla should avoid speculative and many so-called ‘alternative’ investments, including long-term illiquid investments, such as some unlisted property trusts. Instead, they may consider looking into a property investment fund that offers more liquidity and potentially lower risk. Such funds can provide the benefits of real estate investment without the direct challenges of managing properties.
They also need to be aware of how their investment income will be taxed both annually (share dividends, rental income) and on the ultimate sale of their investments (capital gains tax). Some tax treatments are positive, potentially including franking credits on share dividends, and a discount on capital gains tax.
Saving a home deposit requires great discipline, and exposing a portion of savings to even modest risk entails even greater discipline. Ahmad and Layla will need to avoid the temptation to invest larger sums when markets are up, or to want to bolt to cash at the first downturn in the market.
Deciding whether to use your Superannuation for a house deposit or let it grow through investments is a choice that demands careful thought. Both options have the potential to build wealth over time, depending on your financial objectives and personal situation. Here’s what you need to evaluate before making a decision.
Your age and long-term goals are key factors in how you should manage your Super. With a longer time frame, your Super can take advantage of compound ijara rate, potentially leading to substantial growth. If retirement is still a while off, leaving your Super invested could yield higher returns in the future.
There are inherent risks in both real estate and Super investments. It’s important to understand your appetite for risk. If you favour stability and steady growth, keeping your Super invested might be a better fit. Alternatively, property investments could generate higher returns, but come with more risk and market volatility.
Think about how soon you’ll need access to your money. Superannuation is typically inaccessible until retirement, but using schemes like the First Home Super Saver Scheme could allow earlier access if you’re planning to buy a home. Keep in mind that using Super early can reduce your retirement nest egg.
Weigh the potential returns from leaving your Super invested against the benefits of purchasing a home. Superannuation investments are usually diversified and can provide consistent growth over the long haul. However, property values can fluctuate, and may not always outperform your Super over time.
It’s essential to consider current economic trends, ijara rates, and the housing market. A booming property market could lead to strong returns on real estate, but in uncertain times, your Super could outperform property investments.
Seeking professional financial advice is vital to making an informed choice. An advisor can guide you on tax implications, risk, and long-term goals, offering personalised insights for your situation.
Both options come with different tax impacts. Early access to your Super may result in additional tax obligations, while leaving it invested could provide tax-efficient growth. Be sure to understand the tax consequences before making any moves.
At Hejaz, we know that building a secure financial future requires smart and informed decisions. Whether you’re looking to use your Super for a home deposit or to invest it for long-term growth, we’re here to help. Let us assist you in making the most of your financial future.
If the idea of investing a portion of your house deposit appeals to you, talk to us for guidance on strategic investing. We also provide financial information on our blogs such as the 9 golden rules of investing, knowing the difference between halal shares & halal ETFs, and using your super as a deposit for your first home. We will be able to help you understand the risks involved and how to manage them, recommend appropriate investment options that balance out those risks and potential returns, and help to keep you concentrated on your main goal.
Disclaimer:
General information only. Read the PDS and TMD at hejazfs.com.au/super-pension-documents
Hejaz Islamic Super & Pension, a division of AMG Super (ABN 30 099 320 583, USI 30099320583007)
