There really doesn’t seem to be any point in saving in the traditional way. Term deposits are the bank product most people choose to tuck away some money and watch it grow over a fixed period. Anyone can open a term deposit and they are extremely safe. However, the interest rates now are so low that there appears to be no incentive to save that way.
So, if we understand broadly why low mortgage interest rates is often bad news for savers, we can consider other savings options. The two rates are affected by the official cash rate. That is the targeted rate of interest on overnight funds that banks can borrow from the Reserve Bank and other financial institutions. The cash rate basically acts as a benchmark for the price of banking products like home loans and savings accounts.
That’s why when the RBA lowers the cash rate – those big announcements every month – it often means the interest rate on your savings account goes down but it can also mean that the interest rate on your home loan also goes down, making your mortgage more affordable.
There is lots of advertising for low mortgage interest rates and how you should take advantage of the great deals and clearly no fan-fare for term deposits. Could there be a way is to save using the low mortgage rate? YES
Using a property to save money
Home ownership is the dream and saving for the deposit, stamp duty and legals is the nightmare. The more expensive the property the more expensive the fees so buy low. Buying somewhere other than your desired location is an alternative saving plan and again we see the multipurpose capacity of real estate.
There is a term for buying an investment property where you can afford but remain renting in the area you want to live – renvesting. However, other people could consider this as an option as a deposit without as many cons as the investor has a home. It offers the opportunity to buy an affordable investment that has a return that is higher than a term deposit with tax incentives.
The savings plan advantages are:
- buying in established regional towns or in cheaper outskirt suburbs generally means you can buy it for less and the deposit needed is lower and won’t take as long to save;
- having rental income that you can put towards mortgage payments effectively allows any surplus savings is increasing the equity;
- unlike loans for owner occupied property purchases, where the mortgage is not tax deductible, loans for property investment purposes are generally tax deductible;
- when the saving goal is reached you may be able to keep both properties and
- allows parents to save for their children, young adults to save for a future home and older people to have a return higher than a term deposit.
What to look for
Buying in less expensive suburbs and regional towns as a strategy for saving, you need to consider affordability; cash flow; infrastructure; life style and economic development. A good rule of thumb for cheaper suburbs is to check whether neighbouring suburbs are becoming too expensive and for regional investing its population size.
It is very disheartening seeing property prices rise and feeling like you cannot reach your goal however there are other options and some may possibly be better.