Best ways to invest while saving for a house deposit

Your questions answered:

In this episode of Q&A, your way, Morningstar's Sarah Dowling explains why investing for the short term comes with risks, especially if you're seeking returns above inflation. 

Key Points: 

• Achieving returns above inflation are a steep ask at the moment, with the latest CPI rising to 7.8% over the year to the December quarter. RBA forecasts see headline inflation subsiding to 4.75% by end-2023.
• Government bonds are considered to be less risky than equities, but the yield on a two-year treasury is currently around 3.1%. Bonds can also lose money over the short-term as we learned in 2022.
• With a two-year time frame, the safest option a savings account or term deposit, with competitive interest rates around the mid-4% range.
• Eligible first-home buyers may also be able to save for a deposit through their super fund, through the First Home Super Saver Scheme, although there are limitations on how much you can contribute each year. More information on the scheme, and other government measures for first-home buyers can be found on the Treasury website.

Transcript: 

Sarah Dowling: [Reading the question] We recently migrated to Australia, and don't know much about investment options here. We have roughly 80K sitting in a savings account that keeps losing value against inflation. We have two more years until we get permanent residency, and then we'll aim to purchase a property. I'm looking for non-risky investment options, which yield over inflation. I've checked out government and corporate bonds, but most of them have three to five plus years maturity. What are your recommendation?

Answer: The issue here is really about time frame. Two years is a very short period to be investing, especially in the share market and achieving returns above inflation at the moment is an incredibly tough ask, particularly because the latest CPI puts annual inflation at more than 7%. That is expected to subside. But even still by the end of the year RBA forecast put inflation at about 4.75%. So let's look at some options here.

So the really great thing here is that you've got a financial goal that you're aiming towards. If that time frame was longer, then the goal of achieving over inflation would become more achievable. You'd also have more options available there without taking on so much risk. We are in a period of high uncertainty at the moment. There's a lot of volatility in the market. And so investing your entire house deposit into shares may not be the best option for you.

Bonds are considered a lower risk than shares, but having said that, the yield on a 2 year treasury is in the low 3s at the moment. So in this situation, the safest option is really to park your cash in the bank, either in a savings or a term deposit account. Interest rates have improved recently, having said that there is a big gap between the lowest and the highest interest rates for savers at the moment, so make sure that you are doing that comparison.

The key thing here really is around your time frame and your situation, whether you need to buy that property within the two year period or if you can push out a little bit further, that will open up more investment opportunities and potentially mean that you can beat that rate of inflation. And remember all investments have a risk component. So your time frame is really important in determining what level of risk you're prepared to take.