How to get a head start in the property market

How to get a head start in the property market

As lenders loosen the purse strings and house prices take a dive, first-time buyers are more likely to be able to buy than at any time since the credit crunch. But the average down payment needed remains above $45,000, locking potential new homeowners out of the market (based on a 10 percent deposit and using RP Data’s median capital city house price as at January of $450,000).

Given the right circumstances; a stable income, little-to-no outstanding debt, and a sensible budget; saving for a large sum can be achieved within a few years. But first you’ll need to determine the best saving method for your situation, whether it is using the first home saver scheme, a high-interest savings account or term deposit account.

Online saver versus first home saver accounts

The government’s First Home Saver scheme is very attractive if you are planning to enter the housing market for the first time in the next few years.

For example, assuming you start with a $20,000 sum and deposit $1000 per month for the next four years at a base rate of 4.8 percent, (taking into account interest earned and tax saved) a first home saver could potentially have a final balance of just over $81,000. By contrast, the best online savings account available at the moment would leave you with a balance of $77,000 after that time; so you’d be over $4000 better off with the First Home Savers Scheme because of the rate boost and the lower tax rate.

As the name suggests, these accounts are only open to people saving for their first home. They have two main benefits. First, any interest you earn on the account is taxed at 15 percent, so if you earn more than $37,000 you’ll save at least half the tax you would have paid on a normal savings account. Second, to encourage savers to make regular deposits, the government will add a bonus that’s equal to 17 percent up to a maximum contribution of $5500 each year.

There are a number of conditions that must be met to earn the bonus contribution. First, you have to deposit at least $1000 each year for four financial years before you can withdraw your savings. Second, the house must be your principal place of residence, not an investment property. Finally, once your account balance hits $85,000 you can’t make any more contributions, though interest will still be credited to the account.

Fixed term accounts

Fixed term deposits can be a smart option for future home buyers with rates above 6 percent available on three-year terms. But because these types of accounts don’t allow regular deposits, even with a lump sum of $20,000 fixed for three years at 6 percent p.a., interest earnings are capped at $3933 (compounded).

The best savings option will depend on your circumstances, however, so take the time to do plenty of research to maximise your home deposit; because the long term savings could be significant.

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Learn more about term deposits

Is term deposit interest taxable?

The interest that you earn from your term deposit is considered taxable income. Because your term deposit interest is taxable, it should be disclosed on your annual tax return.

It’s important to note that circumstances may differ depending on whether you provided the account holder with your tax file number (TFN). If you did not supply your bank or other financial institution with your TFN, they are typically required to withhold tax from your interest earnings.

If you’ve invested in a deposit that lasts longer than 12 months, you’ll need to claim your earned interest in the year that you received it. For example, if you receive interest monthly, you’ll need to claim your earnings at the end of the financial year. However, if you only receive interest at maturity, you should claim your earnings in the year that you received the lump sum of interest.

How do term deposits work?

Term deposits are flexible, low-risk, and earn you interest over time. But before you apply to open a term deposit, you might be wondering: how do term deposits work?

A term deposit is an agreement you make with a financial institution. This agreement will specify a certain amount of money that you will give the bank for a certain amount of time. In return, you’ll earn a fixed amount of interest on your deposit throughout your term.

Term deposits work as an exchange between a financial institution and an individual. You can think of your term deposit as a loan to the bank. Because you’ve loaned the bank your money, they’re willing to pay you interest on your deposit.

What is a term deposit?

A term deposit is an investment savings account. A term deposit usually pays a higher rate of interest than a regular savings account, with the interest rate fixed for the term (or duration) of the deposit.

You can open a term deposit account for one month or up to five years depending on your investment goal, and invest as little as $500 to start earning a profit.

With a term deposit, you get to decide how much you want to invest (the principal or deposit), for how long (the term or duration) and the frequency of interest payments.

A term deposit represents a secure form of investment, unlike trading in shares or purchasing real estate. And a term deposit up to $250,000 is protected by the government guarantee.

How often do term deposit rates change?

One of the advantages of a term deposit is that this type of investment enjoys a fixed interest rate. This means that the interest rate that you have signed up for will not change during the period of your term deposit, regardless of rising or falling market interest rates.

However, it is important to be aware of the end of your term deposit. Once your term ends, whether this is in three months or three years, many banks will default to rolling over your deposit into a new term, sometimes with a lower interest rate. Once your term deposit rolls over, you will then be locked into this new fixed interest rate for another term.

Make sure to use the grace period at the end of your term to your advantage. Shop around for a competitive interest rate and reinvest your money accordingly.

Are term deposits safe?

Term deposits can be a great way to build your savings, but before you invest, you might have one important question. Are term deposits safe?

When it comes to investing your money, you can choose between high-risk and low-risk options. High-risk options tend to have a better potential payout, but you also risk earning no profit at all or even losing your original investment.

Low-risk options tend to earn less profit than high-risk options, but they’re also safer, with little to no risk of losing money. Term deposits fall into the low-risk category.

Term deposits are safe because they’re low-risk, but they’re also protected by the Australian government’s Financial Claims Scheme. This government guarantee will insure your deposit for up to $250,000 per person, per institution, meaning that even if the bank collapses, the government will reimburse you for your deposit.

What is a term deposit account in a bank?

A term deposit account in a bank is a type of investment where you lock away a portion of your savings for a fixed period in return for earning a set amount of interest.

Opening a term deposit account in a bank is a safe way to earn a stable return on your investment of cash.

Term deposit accounts can be a good way to give your savings an extra boost without the need to actively watch or manage your funds during the term of the deposit.

Term deposit accounts in a bank are a popular type of investment because they’re safe and there’s very little risk that you could lose your money.

If you make a term deposit of up to $250,000 with an authorised deposit-taking institution, it’s guaranteed by the Australian government, which means there’s virtually no risk of losing your money and you’re guaranteed return.

Interest rates vary depending on the length of the term, the amount you deposit and the bank you choose.

Are term deposits compounded?

Term deposits can be compounded, depending on what you choose to do with the interest.

There are two ways to receive interest from a term deposit: either a lump sum at maturity; or paid on a regular basis, usually monthly. If you get your interest paid regularly, you can get it paid into a transaction account, or back into the term deposit account. By using this second option, you’re getting interest paid on your interest. In other words, it’s compounding.

Having the money paid into a transaction account means you can access it for your day-to-day spending, while compounding the interest means you get a better overall return on your investment. Both have advantages, depending on your needs, but be aware that some term deposit accounts that pay interest regularly may offer a lower interest rate to offset the effect of compounding.

How do you calculate term deposit interest?

If you’re ready to open a term deposit, there’s a lot you’ve already figured out. You’ve decided on the length of your term and found the best interest rate, but there’s something you still might be wondering. How do you calculate term deposit interest?

One of the easiest ways to calculate term deposit interest is by using a term deposits calculator. However, you can also estimate your total earnings on your own.

A fixed interest rate signifies what percentage of your original balance your term deposit will earn annually. For example, a deposit of $1,000 at an interest rate of 3 per cent will earn three per cent of $1,000 annually – meaning you’ll earn $30 of interest each year.

You can estimate your interest using three variables. Multiply together your deposit amount, interest rate, and term length and you’ll approximate the interest a deposit will earn. For example, if you invest in a term deposit for $5,000 at an interest rate of 3 per cent for two years, your interest would total $300.

How do I pay tax on term deposits?

Just like your regular income, the interest you earn on term deposits is taxable. You might be wondering, “How do I pay tax on term deposits?” The tax you pay on your interest will depend on the length of your term and when your interest is paid.

You should pay tax on any interest that you have received within the current financial year. For example, if you receive monthly interest payments, these payments should be claimed on your tax return. However, if your term deposit is longer than one year and you will only receive interest at maturity, then you will pay tax on your interest in the year that you receive it.

Paying tax on your interest is much like paying tax on your income. The money you have made in interest should be claimed on your tax return along with any other income in that year.

Will term deposit rates increase?

While there’s no definite way to predict when term deposit rates will increase, it may help to understand some of the factors that influence term deposit interest rates.

The official cash rate is set by the Reserve Bank of Australia (RBA). When the RBA either increases or cuts interest rates, it influences the interest rates set by banks.

The other factor that determines when term deposit rates will rise is competition between banks. Banks may increase their term deposit rates or offer higher rates as an incentive to win new customers over or increase their market share.

Term deposit interest rates will also change, depending on how much you invest and how long you invest.

Can children have term deposit accounts?

It’s many parents’ wish to invest money for their child early, so you might be asking the question, “Can children have term deposit accounts?”

The short answer is yes. You can open a term deposit with funds that will be used to support your child. There are two options when it comes to opening a term deposit for your child. The first is that you open the term deposit in your name rather than theirs. Opening the deposit in your name means that you have full control over the deposit and can withdraw money by signing a request.

You can also open a deposit in your child’s name, but you should consider waiting until your child can sign his or her name, as well as understand their term deposit account. If your child isn’t old enough to sign a request for withdrawal, you won’t have access to withdraw the funds if you need to.

What is the best interest rate for a fixed term deposit?

The best interest rate for a fixed term deposit changes all the time, as interest rates move up and down and banks compete with each other to win market share.

To find the best interest rate for a fixed term deposit, it’s helpful to understand how interest rates are applied to term deposits.

There are three factors that determine the fixed interest of term deposits:

  1. The size of your deposit
  2. The duration of the term
  3. The frequency of interest paid

Term deposits vary in duration from one month to five years or more. Interest rates generally work on a sliding scale; shorter terms get a lower rate, longer terms get a higher rate.

Here are a couple of examples of how interest is applied to term deposits.

  • A $10,000 term deposit taken out over 12 months, with interest paid at maturity, might receive a fixed interest rate of 2.20 per cent.
  • A $10,000 fixed term deposit taken out over 12 months, with interest paid quarterly, might receive a fixed interest rate of 2.00 per cent.

Using the size of your deposit, the duration of the term and how often you want to be paid interest, you can shop around for the best interest rate for a fixed term deposit.

What is a secured term deposit loan?

A secured term deposit loan is a personal loan that’s secured by a term deposit. To take out a personal loan that’s secured by a term deposit you would need to go through the same bank.

Generally, secured term deposit loans offer a lower rate of interest than standard personal loans. This is because the interest generated by your term deposit offsets the interest applied to the loan.

A secured term deposit or term deposit secured loan enables you to leave your money invested in a term deposit while still being able to make significant cash purchases.

This type of personal loan usually offers many of the same features of a standard loan, including: redraw facility, variable and fixed interest rate options, and the ability to make extra repayments.

Can you take a term deposit out early?

If you are considering a term deposit, you may be wondering if you can take out your money early. It is possible to break a term deposit, but it will cost you both time and money.

Many banks require 31 days’ notice if you wish to break a term deposit. This means that if you need money urgently for an unexpected expense, it may not be worth breaking your term deposit. Make sure to read the fine print to see if this wait period applies to the term deposit you are considering.

You will also most likely need to pay a breakage fee in order to access your funds, and you may also incur a reduced amount of interest. All of this information – including the fee amounts – should be available in the term deposit product disclosure statement (PDS), so ensure that you read the fine print before committing.