How to boost your deposit and get on the property ladder – Nadine Higgins

First-home buyers are often thwarted by the 20% deposit hurdle. Photo / 123rf

THE FACTS

• Aspiring first-home buyers face challenges with deposit requirements and limited investment returns.
• Alternatives like Blossom and Wedge offer higher returns through fixed-income investments but involve risks.
• Aera combines savings, services, and credits up to $10,000 to assist buyers, requiring full-service use.

I wrote recently about the different schemes available to aspiring first-home buyers, now that the First Home Grant is gone.

But those methods – shared equity, rent-to-own and leasehold tenure – all involve being beholden to another party for the medium to long term, and most have income caps, so they’re not a solution for everyone.

So, what might help you get there faster, without the strings?

A better rate of return

The conundrum when you’re saving for a house deposit is your investment horizon is short, so conservative investment options are generally advised, especially if you need ready access to the funds. Right now, interest rates on on-call savings accounts are paltry (1.72% on average according to the Reserve Bank), so after tax, it doesn’t give your savings much oomph.

Several companies are offering alternatives aimed at generating a better rate of return, including Wedge Money and Blossom. It’s important to note they’re not banks or savings accounts; instead, they invest in fixed-income assets, like bonds.

“BlossomSave” is Blossom’s short-term saving option, and targets returns of 5.45% per annum.*

Wedge Money has a “Set Rate” that is revised daily of 3.75%, but that’s net of costs. (Wedge also has a higher weighted average credit rating, AA versus BBB+.) To get a bank rate close to that (3.5-3.6% ish), you’d need to commit to a 90-day notice saver or term deposit.

Both Blossom and Wedge appear to make money in a similar way – by achieving a rate of return higher than that promised to the customer (although Blossom also has management fees). I asked Wedge’s managing director Dave McLeish what was to stop them offering a lower rate to maximise that differential and he made this very good point: “We must always offer an attractive alternative to what our members can get elsewhere, otherwise they will simply take their money elsewhere.”

There’s always some risk involved with investment, even when it’s conservative, and while a better rate of return is helpful, of course, it will still take some time to see a material difference to your house deposit.

A smaller deposit

First-home buyers are often thwarted by the 20% deposit hurdle – it’s not always hard and fast, but the easiest way to circumvent it is to buy a new-build property, which only requires 10%.

That does mean, of course, that you’d have to be able to afford paying a loan that’s 90% of the purchase price.

I have known developers to offer long settlements with an initial 5% deposit, the logic being that you could lock in today’s price in a rising market and continue saving.

However, you need to exercise extreme caution here. You need to be certain you’ll have the balance of the deposit and can secure the lending at settlement, or you’re in real trouble.

If the property’s market value is lower at settlement instead, you’ll struggle to get lending without tipping in more money yourself, and if you don’t have it, that could be ruinous.

You also need to ensure your initial deposit is locked in a solicitor’s trust account until settlement.

The easiest way to circumvent the 20% deposit hurdle is to buy a new build property, which only requires 10%. Photo / 123rf

A one-stop shop – and a $10k carrot

This last option seems like it has the most potential to be a game-changer.

Aera brings together the higher-interest saving option with almost all the other services required to get you into a home – mortgage broking, insurance, real estate agents and developers – and guides you through a digital learning and milestone-based platform to get you ready to buy.

But the real headline-grabber is that if you work with them from beginning to end, including buying a new-build property (through their developer-partners) and completing tasks such as learning modules and savings milestones, you can earn up to $10,000 worth of credits that can then form part of your deposit.

If you’re a skeptic (like me), you’ll probably ask ‘what’s the catch?!’ I’m yet to find one, but to qualify for the full amount, you need to use their services.

How do they afford to do that and still make a profit? Co-founder Derek Handley, says by putting all services under one “roof” rather than through separate providers, who each earn a commission (which I think most buyers don’t clock).

“You have to go to nine different people to sort out the journey to buy your first home. There’s fees everywhere in the ecosystem, so if you buy a 600-and-something-thousand-dollar home, there is at least you know 30-plus thousand dollars of fees going out the door, which is half of the 10% deposit that you need.”

But what about the “why” part? Handley, through his charitable trust The Aera Foundation, is focusing on backing “creative responses to social and environmental challenges”, according to its website, and there’s no doubt housing is a social challenge. He told me, “My natural response is there should be a market-based system or a company that could solve an issue if there’s a market problem.”

Updates to the app are coming soon, but Handley says they’re already getting about one family a week into a new home.

As always, do your own due diligence, but Aera seems to be thinking differently to try to solve the first-home buyer challenge, and that is to be encouraged.

*An earlier version of this story incorrectly stated a 1.2% fee would come out of Blossom’s 5.45% per annum targeted return.