How to invest if you want to buy a house in 10 years or less
Saving for a deposit on a house is no easy feat.
In order to avoid paying lender mortgage insurance premium (LMI), saving up a full 20% down payment can be a huge sum. For big, long-term goals like this, investing might seem like an ideal way to make money grow quickly.
But, investing poses a big problem: risk. Investing your down payment fund isn't always right, especially if you're planning to buy in the next few years. Unlike for other long-term goals like retirement, investing isn't always the right move.
Unlike retirement savings, your home down payment savings won't have decades to recover from short-term market losses.
Whether or not investing your down payment savings is right for you mainly depends on when you want to buy. Here's how to tell if you should invest your down payment savings, and how to do it.
If you're planning to buy in the next 2 years, don't invest
Your buying time frame determines where you should save. If your goal is just 18 to 24 months away, consider saving in something that's really liquid and really low risk. A cash account similar to high-yield online saver which keeps money liquid and earns interest.
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If you know you won't buy for 2 to 5 years, consider a term deposit
For anyone who's not looking to buy in the next two years, low-risk investments are ideal. Even if they don't yield the highest returns available, it's better to play it safe with deposit savings.
Opt for lower-risk investments like term deposits (TD). With TDs, money is in an account for a pre-determined term, and generally earns a slightly higher interest rate than it would in a high-yield savings or money market account. While taking money out before the TD ends will incur a penalty, the interest rate won't change, during the fixed period.
TDs are great for anyone who has more than two years before they buy. Often, the longer your money is committed, the higher interest rate you will earn. Terms often range from one year to five years.
If you have 5 to 10 years before you buy, stocks are an option
Investing in stocks and bonds could be an option for longer-term savers. If you are thinking long-term, investing this way through a brokerage account could be an option, as your money has a longer time to recover from any changes in the market.
Even then, this should only be a part of your savings. Look into lower-risk options like a five-year TD or a high-yield savings account to keep the rest of your savings safe and growing steadily.
While investing deposit savings sounds tempting, it might not always be the best move. If you are trying to save more but see the value drop with your account, it will likely curtail your saving.
Opting for lower-risk investments like TDs or keeping your deposit savings in a no-risk high-yield savings account are typically the best ways to build your savings. It's better to give up expected investment return to have the money available when you want to buy your house than to miss out because you invested too aggressively and made huge capital loses.
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This article via BI does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.