Return, But Still No Deposit

Sydney Morning Herald

Wednesday August 25, 2004

Interviews by Michelle Innis

After six years working in London, Fiona and Martin Davies returned to Australia determined to start saving. The couple, both aged 31, have managed to stash about $25,000 in high interest savings accounts in the past 18 months. Their goal? To buy a $500,000 home in Sydney's inner west at about the same time as they start a family.

"Ideally we'd like a rundown terrace house, but we're not sure if that will be in our reach," says Fiona.

Adviser Stuart Brown is the director of financial services/finance broking at WHK Financial Services.

Strategy Based on their combined income and annual expenses, Fiona and Martin have the capacity to save about $30,000 a year. If they can direct that amount into their high-interest savings account for the next two years, their accumulated capital would be about $90,000 by mid-2006.

Assuming a $90,000 contribution, the loan required would be about $415,000.

Because the loan-to-value ratio is above 80 per cent, mortgage insurance would be payable. Savings of about $105,000 would be required to avoid mortgage insurance.

As first-home buyers, they may be entitled to an exemption of stamp duty on the mortgage and land under the First Home Plus Scheme in NSW. This could produce savings on their purchase in excess of $18,000. They may also be eligible for the Federal Government's First Home Buyers grant of $7000.

In determining how much they can afford to borrow, a general rule of thumb is five to six times gross income. It seems possible to make their desired purchase based on their current income, but of more significance is the level of debt they are capable of managing without a significant change in their lifestyle.

When they are no longer paying rent their savings capacity will rise to $43,000 a year, or about $3500 a month. Monthly repayments of $3500 on a 30-year principal and interest loan at the long-term interest average of 7 per cent would comfortably service a mortgage of $415,000 and enable total debt repayment in 17 years.

Fiona wants to take time off for the birth of a child, which makes proper cash flow management important. They could take a home loan with maternity leave repayment reduction or draw against any additional repayments when their income is reduced.

If they wanted to buy their desired property earlier, they could buy it and rent it out, which could reduce the cost of owning the property to as little as $100 a week. However, it could also jeopardise the First Home Plus benefits.

Because Fiona and Martin were working overseas, they have very little super. It is an attractive savings vehicle, but it cannot be accessed until age 60 and their pre-retirement objective is to achieve home ownership, so we recommend they do not make additional super contributions until their home loan is repaid.

Their biggest asset at present is future earnings, hence it is critical both take out salary continuance cover.

Readers are invited to appear in Makeover and receive a free financial plan. You will be interviewed and photographed. Please email your details to makeover@mail.fairfax.com.au

Names Fiona and Martin Davies

Occupations Project manager/horticulturist

Income $101,000 combined

Savings $25,000

Debts None

Superannuation $20,000 combined

Correction on 01-Sep-2004

Correction: Rosie Guardiani, 26, is about to jet off to Japan to teach English for a year. Before she heads overseas, though, she's keen to run a reality check on her long-term financial goals.

The marketing professional jumped into the property market early in life, buying a one-bedroom apartment in Melbourne almost three years ago. It is currently leased at $220 a week and this income will cover the bulk of the monthly repayments on her $194,000 mortgage while she is away.

With the mortgage under control, her main concern is to see whether there is any way of achieving her goal of retiring at 40.

"I want to find out what is realistic and achievable and how I can get there," she says.

Adviser Sonia Turkovic is an authorised representative of Australian National Financial Planning.

Strategy As Guardiani's main objective is to accumulate wealth during her working years through a combination of investment properties and managed investments, we have made several recommendations.

To protect her current asset - her property - we recommend she applies for life and total and permanent disablement insurance through her existing super fund before she travels to Japan. She should also arrange a will and grant an enduring power of attorney before she leaves Australia.

We also recommend she pays off her HECs debt as soon as possible to get the advantage of the 15 per cent discount available to people repaying their HECS debt early.

As her property is negatively geared, she will need to ensure additional funds are available in her bank account in Melbourne to service the loan and cover any maintenance work while she is away. She estimates she will need an extra $200 a month to cover these expenses during that time.

While she is in Japan, we recommend she accumulates any surplus income in a high-interest savings account. This money could be transferred to her bank account in Australia.

The strategy for achieving her goals will need to be reviewed when she returns to Australia as it will depend on her income and accumulated savings at that point.

However, generally we would suggest she uses part of her accumulated savings to purchase a car and part to commence an aggressive wealth accumulation strategy. The remainder could be put towards a deposit on a second investment property.

To help her achieve her goal of retiring at 40, we would recommend she commences a managed investment strategy where she uses $5000 of her savings and borrows another $5000 through a margin lending facility.

Assuming a time frame of at least seven to 10 years, this money could be invested in a growth-oriented fund and she could add to the investment on a regular basis by commencing an instalment gearing plan.

Name Rosie Guardiani

Occupation Marketing professional

Income $48,000

Investments $270,000 apartment, $3500 savings

Debts $194,000 mortgage, $6000 HECS debt, $1000 credit card

Superannuation $9790

Readers are invited to appear in Makeover and receive a free financial plan. You will be interviewed and photographed. Please email your details to makeover@mail.fairfax.com.au

Correction Last week's Makeover should have been credited to Christine Long.

© 2004 Sydney Morning Herald

Back to News Index | Back to Home