I was listening to a podcast the other day where they compared the property markets in Melbourne, Sydney and Brisbane. They noted that compared to Sydney and Brisbane, Melbourne’s house prices have remained stagnant over the past few years. This was due to a range of factors such as the 2020-21 COVID-19 lockdowns in Melbourne, the apartment oversupply across the city and high land taxes for investors. The stagnant house prices have made the Melbourne property market conducive to first home buyers and investors looking to buy their first home or enter the property market.
I have been tracking the outcomes of auctions in the suburbs of interest over the past few weeks. And just yesterday, I was looking over properties in the suburbs of interest that have been sold over the past month. Although I can see bargains in some properties that are within my borrowing capacity, I will be going into a property market that may be increasingly difficult to get into, for two reasons.
First, I am looking for a property that I can live in for a long time and that will be in high demand in the future when I lease or sell it. That means the property has to be rare in the market, yet valuable to the future renter or home buyer. Apartments in high-rise apartments are not rare and are clearly targeted to investors looking to rent them out, so I am ruling them out. I am also avoiding apartments on or near main roads or train lines as they would make too much noise and are overpriced for their location. I am anticipating that these apartments would be hard to lease or sell to other people in the future, making them bad property investments.
Instead, I am looking for apartments in a quiet street that I can stay in for many years and that would be valuable to a future buyer. The apartment would have enough indoor space for me to live by myself and work from home. Additionally, there is a private balcony or backyard for me to get some fresh air or to have a barbecue. Ideally, the rooms would be nicely laid out, with the living rooms separate from the bathroom and bedrooms, so that I can separate areas to relax from areas to work and to sleep. These requirements eliminate a lot of apartments for me, leaving me with few options to choose from. Additionally, there is a lot of demand for these apartments with some of them going for auction. These will be competitive to buy, particularly as more people enter the property market to buy their first home or to invest. This will be a main challenge in buying my first home.
Second, having kept track of auction outcomes in the suburbs of interest, the property market is increasingly heating up. I am seeing that most properties were sold either before or on auction day. Where the sold prices have been made publicly available, most properties were sold above the upper limit of the price guide. That has made me feel a bit apprehensive on how competitive the auctions will be, particularly if it is the property I really want to live in.
Still, I have a few weeks before I get my pre-approval to buy my first home. And there are more properties that will go on the market over the next few weeks, particularly as spring progresses. That gives me some leeway to do some desk research, go to some property inspections and watch some auctions to get acquainted with the property market. Hopefully by the time I receive my pre-approval from the bank, I will be ready to enter the property market and buy my first home as soon as possible.
When I last wrote “My First Home Buyer Journey” in early February 2024, I had to put the series on hold as my borrowing capacity was not large enough to buy the ideal property and suburb for my needs. Even though I was still saving money for my home deposit, I was looking to work more days. This would boost my income which would increase my borrowing capacity, allowing me to buy a better property in the suburb I want to live in.
Since that last blog post, a lot of things happened in my life. Primarily, I had to leave one of my roles at the end of April 2024. Even though I spent a few more months to finish off my work, this put a massive damper on my pursuit to buy my first home. Not only was my income irregular and inconsistent which would have made it difficult for me to get a home loan, but I also had to focus on finding more work.
It took me four months of searching and applying for jobs before I managed to land another role. That role was in the same university as my other role, allowing me to work full-time in one workplace. This means I would receive my pay under one payroll, making it easier to show evidence of my income. Not only that, but I was also earning more money now than I would have had I stayed in my old role. Combined, these have increased my borrowing capacity which have motivated me to start searching for my first home again.
Because of this, I will be reopening the “My First Home Buyer Journey” series. As I start ramping up my first home search again, I would like to record my journey of finding and buying my first home. The updates might not be weekly as my home search activity may vary throughout this journey, but I will attempt to write regularly where I can. Additionally, I may also write on some recent issues in Australia’s property market from my perspective. I have in mind a recent topic issue in Australia that I would like to write about. It will be in an innovative format that would shed light on the different perspectives behind that particular issue.
For now, I would like to record what I have been doing in my home property search over the past 7 months. Even though I have not started property hunting in earnest, I have taken some steps to research the suburbs I would like to live in and get myself prepared for the property hunt.
What I have been doing in the property hunt?
Over the past several months, I have been thinking about the suburbs that I would like to live in. I have been exploring a few suburbs before and after I decided to put the “My First Home Buyer Journey” blog series on ice. As I came to start in my new role, I have narrowed my focus to two groups of neighbouring suburbs: one in inner east Melbourne and the other in inner south east Melbourne. Both groups are not only near train stations, but they are also close to amenities which would support my independent living. Narrowing my focus on these two groups of neighbouring suburbs would allow me to focus my property research in these areas.
Over the suburbs I have chosen, I have continued to look at all properties that have been sold in the past few months to narrow down the properties and the areas that I would like to buy. I have also been keeping track of the auction results in these suburbs to get a feel of what the property markets are like in these areas. The research work I have been putting in has been massively helpful in understanding how hot the property market is in each suburb. This will allow me to plan how I should approach each property market and how I will set the right price for the property I would like to buy.
Supplementing my desktop property research has been my in-person attendance to a few inspections and auctions. In terms of inspections, I have been looking at what properties in the suburbs are like and how easy it would be for me to walk to the train station and nearby amenities. I have also been observing a few auctions to see how they operate and how people put bids. This will be helpful in planning my approach to auctions and how I should price properties before an auction.
Lastly, having earned a regular income from both jobs, I have submitted my pre-approval application with a bank. I noted earlier that with my full-time job, my borrowing capacity has increased, and I also have a large deposit. However, my maximum borrowing capacity is still not enough for me to buy a property that I can live for a long time, in the suburb that I want to live in.
Hence, I am applying for the Victorian Homebuyer Fund with the bank. It is basically a shared equity scheme where the Victorian government owns part of the property I purchase. Getting in the fund would allow me to buy a better property for myself that I can live in for a longer period of time. The drawback of trying to get into the fund is that it takes six weeks to get pre-approval. That is because I need to get approval from both the bank and the Victorian Government to apply for the scheme. Even though the approval process from the bank does not take too long, there is a long queue to get approval from the Victorian Government to get in the scheme. It is such a long wait to get pre-approval, particularly when the property market is opening up for spring. There’s also the possibility that I might miss out on getting in the scheme as there is only a limited number of spots.
Nevertheless, getting into the Fund is a better option for me to buy and live in a property for a longer period of time. Additionally, I have some time to keep doing my desktop research and attending inspections and auctions to be well-informed of what the market is like in the suburbs I want to live in. By the time I get pre-approval from the bank, I will have been ready to dive into the property market, and make a serious effort to buy the property that I want, whether by private sale or by auction.
Since my last update post, I have selected the mortgage broker and conveyancer who will support me on my home buying journey. I have also been researching a few more suburbs in north-east and south-east Melbourne and done a few more suburb tours, particularly inner north-east Melbourne which is potentially a nice area to live in.
Over the past few weeks, I have been looking at my borrowing capacity, or how much I can afford to borrow from a bank to buy my first home. I am doing that right now so that I can start researching the property market by looking at past sales over different suburbs. To determine my borrowing capacity, I have been seeing a few different mortgage brokers and ran a few calculations on the mortgage calculator at moneysmart.gov.au.
I had enough money saved to cover a 20% deposit of the median price of 2-bedroom units in different suburbs. I have also made a concerted effort to minimise my expenses by adopting the Fast and Slow System and diverting much of my excess savings towards my first home. Furthermore, even though I am currently working four days a week, I am looking to extend my working week to five days a week so that I can earn more money to save towards my first home.
A big hit on borrowing capacity
Unfortunately, from both a mortgage broker’s and mortgage calculator’s perspective, the increase in interest rates over the past few years have eroded my borrowing capacity, to the point where I cannot borrow enough money to buy a 2-bedroom unit in the suburb I want to live in. Assuming a 6.5% interest rate on the home loan, making fortnightly repayments over 30 years with no bank fees, my borrowing capacity according to the mortgage calculator ranges from $222,576 to $435,549. This is a reduction from $247,776 to $484,863 for a 5.5% interest rate. Assuming a $130,000 deposit, this means I would only be able to afford a $560,000 home at most which is below the median price for 2-bedroom units in suburbs I want to live in.
Work days per week
% net income on repayments
Repayments per fortnight
Borrowing capacity at 6.5% interest
Borrowing capacity at 5.5% interest
4
30
$649
$222,576
$247,776
5
30
$762
$261,329
$290,918
4
50
$1,082
$371,074
$413,088
5
50
$1,270
$435,549
$484,863
Borrowing capacities over different work days per week, proportion dedicated to home loan repayments and interest rates
What’s worse is that assuming I earn $2,540 per fortnight by working five days a week, half of my weekly income would only cover the minimum repayments on my home loan. This does not give me any room to get ahead of my home loan or to build a buffer on my savings that I can rely on should I suddenly stop earning due to injury or unemployment.
The non-existent margin of error in my home loan repayments is what is putting me off from buying my first home more than not accumulating a large enough deposit. I can see why people are in despair of buying their first home, whether it is not having enough money to cover a 20% deposit or to keep up with the minimum repayments of their home loan.
My next steps
Despite this, I will keep saving more money in an effort to accumulate a bigger deposit so that I can reduce my home loan, allowing me to buy a better property that I can live in for a long time. I am also thinking about whether to go for one of the government initiatives to buy my first home sooner, versus the potential bigger repayments that I may need to make now and in the future.
I am also thinking about whether my first home is something that I would live in forever, or is a stepping stone to a better property in the future. That is something that I will consider as I start to do my research on the property market over different suburbs of Melbourne.
Given the above considerations, combined with other series that I am writing, I am putting regular updates on my First Home Buyer Journey on hold for now. However, I may continue to publish information and update posts on my First Home Buyer Journey if and when they arise.
Buying your first home in Australia can be difficult due to the high property prices and the difficulties of saving money. Although there are first home buyer schemes that let you buy your first home sooner, you run the risk of buying a home too soon when you are not financially ready, putting yourself in financial stress.
Hence, the only guarantee to buy your first home without getting into financial stress is by saving money. Thankfully, there is an effective way of saving money via super: the First Home Super Saver (FHSS) scheme. In this blog post, I will talk about how you can save money towards your first home via the FHSS scheme and the benefits of using that scheme.
What is the First Home Super Saver scheme?
The FHSS scheme is a federal government scheme where you can save money in super to buy your first home. You can make voluntary contributions to your super in additionto compulsory superannuation payments made by your employer. In total, you can voluntarily contribute up to $15,000 per financial year and a total of $50,000 across all years. These voluntary contributions can be made as a:
Concessional contribution, where money voluntarily placed in super is claimed as a tax deduction. This can be done via a salary sacrifice, where you contribute some before-tax dollars into super, or as a voluntary contribution from your after-tax dollars where you subsequently claim a tax deduction.
Non-concessional contribution, where you contribute after-tax dollars to super without claiming a tax deduction.
Then, when you are ready to search for your first home, you can release money that you voluntarily contributed into super, plus any associated earnings that come with storing money in super. There are two parts to withdrawing money from super under the FHSS scheme: the FHSS determination and the FHSS release request.
FHSS determinations
Before you can release money from super under the FHSS scheme, you have to first apply for and receive an FHSS determination. An FHSS determination sets out the maximum amount of money that can be released from super under the FHSS scheme. This is known as the FHSS maximum release amount. You can request an FHSS determination via ATO online services in myGov. Follow the steps below to request an FHSS determination.
Time needed: 5 minutes
Answer the eligibility questions before entering the FHSS determination form.
In the FHSS determination form, record:
-Eligible voluntary contributions, along with the amounts and the date the super fund received the voluntary contribution; and -Any super tax deductions claimed across different financial years (found at the bottom of the form).
Once you submit the FHSS determination form, print off a copy that lists the voluntary contributions made into super.
A few days later, receive a FHSS determination letter from the ATO stating the FHSS maximum release amount. The FHSS maximum release amount consists of:
-100% of non-concessional contributions -85% of concessional contributions, either via a salary sacrifice or as a personal voluntary super contribution where a tax deduction was subsequently claimed. -Associated earnings from the above voluntary contributions under the shortfall interest charge (SIC) rate. This is defined as 3% more than the base interest rate of the financial quarter, not the actual earnings from the super fund.
Note that you cannot withdraw compulsory superannuation contributions from your employer under the FHSS scheme.
You can request as many FHSS determinations as you like every 60 days to capture any new voluntary super contributions and associated earnings. However, once you sign a contract to buy property or request a release of money from super under the FHSS scheme, you cannot request any more FHSS determinations.
Releasing funds under the FHSS scheme
Once you receive an FHSS determination, you can send an FHSS release request to the ATO via myGov. The ATO will ask the super fund to release the required amount to them before depositing it to your bank account. This request can be made any time before signing a contract to purchase a property, or up to 14 days after signing a contract. The amount of money released under the FHSS scheme needs to be included in your tax return for the financial year, though you will receive a 30% tax offset that reduces the amount of tax payable.
Once you request a release under the FHSS scheme, you have 12 months to sign a contract to purchase or construct your home. If this does not happen within that period of time, the ATO may grant you an automatic 12 month extension. If you still do not sign a contract to purchase or construct a home during the extension period, you can either:
Recontribute the released amounts into your super; or
Keep the released amount and pay a 20% FHSS tax.
Once you have signed a contract to purchase or construct your home, you have to notify the ATO within 28 days.
Eligibility criteria for the FHSS scheme
To be eligible for the FHSS, you need to:
Be 18 years or over when requesting an FHSS determination or FHSS release (though you can start making voluntary super contributions from under 18 years of age).
Not previously made an FHSS release request under the FHSS scheme.
Never owned or have acquired an interest in residential, commercial or investment property or vacant land in Australia.
The only exception to this rule is where a person has suffered financial hardship that resulted in a loss of all property, and the person did not acquire subsequent property or vacant land since then. Financial hardship includes bankruptcy, divorce or separation, loss of employment, natural disaster or illness.
Financial hardship provisions need to be requested and then provided to the ATO before the person can start saving money in super under the FHSS scheme.
Furthermore, once you have purchased a property or vacant land in Australia under the FHSS scheme, you need to occupy it for at least 6 out of the first 12 months of ownership.
The benefits of the FHSS scheme
There are numerous benefits to saving money under the FHSS scheme to buy your first home.
1) Another way to save money
The FHSS scheme is another way to save money towards your first home, in a place that is harder to access. You could save money in a bank account to buy your first home. However, if you structure your bank accounts incorrectly, you could find yourself raiding your bank account regularly to spend frivolously on useless things.
By saving money in super towards your first home, you cannot access money to spend frivolously as super is normally inaccessible until you reach old age. You can only get your money from super once you receive an FHSS determination and send an FHSS release request. This allows you to build up your savings in super that is dedicated to your first home.
2) Earn more money
You could potentially earn more money via super to buy your first home compared to a bank account, even if the super fund loses money during an economic downturn. When you withdraw money from super under an FHSS release request, you don’t take the associated earnings or losses from your super contributions. Instead, you receive interest based on the SIC rate on your contributions, set at 3% more than the base interest rate when the contribution was made. That means low returns or losses from your super fund during an economic downturn do not transfer over to your voluntary contributions. Hence, you do not lose any money under the FHSS scheme.
Furthermore, under conditions of high interest rates (graph below), you can earn more money due to the increased SIC rates (orange line) compared to a savings account. This rate can sometimes outpace inflation (grey line), meaning that your money grows faster than price increases, preserving your wealth. In comparison, storing money in a savings account could result in you losing money as the money you earn in interest (blue line) is eroded by price increases (grey line).
Comparing interest and SIC (short interest charge) rates against inflation from November 2019 to November 2023
Hence, the FHSS scheme is a safe place to grow your money to buy your first home.
3) Tax effective
The FHSS scheme is tax effective, where you pay less tax. Have a look at a sample calculation where you save $10,000 under a savings account or super towards your first home.
Scenario 1: In a savings account
Scenario 2: In super
You save $10,000 in a savings account which grows at 5% p.a.
After one year, you earn $500 in interest, resulting in a total of $10,500.
You are charged tax at 34.5% (32.5% marginal plus a 2% Medicare levy) to both your $10,000 deposit and $500 interest.
Hence, you pay $3622.50 in tax, leaving you with $6,877.50.
You save $10,000 in super and claim a tax deduction, making it a concessional contribution.
This attracts a concessional tax rate of 15%, so you keep $8,500.
After one year, you apply for an FHSS determination which allows you to withdraw $8,500 plus associated earnings of 7% p.a ($595). This results in a FHSS maximum release amount of $9,095.
You request a release of the FHSS maximum release amount. This attracts a tax rate of 4.5% of the release amount (32.5% marginal plus 2% Medicare levy, less a 30% tax offset).
You pay $409.28 in tax ($1909.28 total in tax), leaving you with $8,685.72.
A table showing two scenarios of storing $10,000 in a savings account or super to buy your first home
As you can see, you can earn around $1,800 more if you save $10,000 in super and release it under the FHSS scheme, compared to putting it under a savings account. This is because tax rates are lower in super, not only while inside super but also when releasing it. In comparison, marginal tax rates are high and are charged to both money saved in a savings account and any interest earned. Also, you can earn more money under super under the FHSS scheme compared to a savings account due to the higher SIC rates charged under the FHSS scheme.
Overall, you can save more money from earning money under the FHSS scheme while paying less tax.
4) Fewer conditions
There are fewer conditions to using the FHSS scheme compared to other first home buyer schemes. The FHSS scheme just requires you to have never owned or bought any property and to live in your first home for at least 6 out of the first 12 months of ownership. Furthermore, you can buy any new or existing property anywhere in Australia, whether it is a house, townhouse or apartment. In contrast, many first home buyer schemes have restrictions on the places or properties you can live in, and stricter conditions as to how long you need to live in the property or how to maintain it. Hence, as long as you do not have any property, the FHSS scheme is an easy scheme to apply for.
My personal experiences of using the First Home Super Saver scheme
I am using the FHSS scheme alongside my bank account to save money towards my first home. That is because I can only save up to $50,000 via the FHSS scheme, but an unlimited amount of money under a bank account.
Having saved money in my bank account towards my first home, I first saved money using the FHSS scheme in the second half of FY2021-22. I initially contributed $15,000 from my bank account as a personal super contribution which I then claimed as a tax deduction. This allowed me to reduce the amount of tax I needed to pay, resulting in a huge tax refund.
From the beginning of FY2022-23, I salary sacrificed a set amount of money into super to save towards my first home. At the same time, I was still setting aside a portion of my salary plus excess savings towards my first home in my bank account.
By the time I start looking for my first home, I will have saved around $40k under the FHSS scheme and $90k in my bank account. That will give me enough money to put down a deposit to buy my first home, cover any associated costs from buying and moving into my first home and provide a buffer to start paying off my mortgage.
Conclusion
You might not have much money saved towards your first home. However, if you start saving money in your super via the FHSS scheme, you can grow your savings in a relatively safe place that is harder to access. If you combine the FHSS scheme with money placed in a bank account, you can slowly but steadily grow your money, to the point where you have enough money to be financially secure and start searching for your first home.
The FHSS scheme is something that not many people know about. However, it is a hidden gem that harnesses the low-tax environment of super to save money. Hence, you should definitely consider it if you are looking to buy your first home in a few years’ time.
Anything that is posted on The Active Evaluator blog is for general informational purposes only. You should not interpret this information as formal financial advice. If you would like advice tailored to your personal situation, please seek an accredited professional. I am not responsible for any subsequent actions you take by reading my blog as well as any expenses, costs, losses, damages and injuries you or another person may incur in the process.
From time to time, I may publish blog posts giving a brief update of where I am up to on my home buyer journey. These posts aim to shed a personal light on what it is like to buy a first home in Australia which will supplement the information posts that describe how to save and buy a first home. In this blog post, I will talk about the numerous things I did during the Christmas/New Year holiday to prepare for buying my first home.
The First Home Buyer Guide
Over the second half of December 2023, I watched all the videos of the First Home Buyer Guide by Home Buyer Academy to get an overview of the process of buying my first home in Australia. I first heard about the course while listening to a Digital Finance Analytics video on buying a first home under rising interest rates. Since then, I had wanted to do the First Home Buyer Guide to learn more about the process of buying my first home. To prepare myself, I listened to a few First Home Buyer Guide podcasts and did two free coursesfrom Home Buyer Academy to get a feel of what the platform is like. Liking what I heard from the podcasts and the two free courses, I purchased the First Home Buyer Guide for AU$990.
Doing the course was worth it as it taught me an orderly process of buying the right property at the right price. The central idea of the First Home Buyer Guide is that there is a sequential process of purchasing the right property that suits my long-term needs without overpaying for it. This process is encapsulated by the PACE system which consists of ten steps over four phases:
Preparation: It consists of assembling a support crew that would support me on my home buyer journey, knowing my borrowing capacity with the money that I saved and thinking about what I would like in my first home.
Action: This consists of the property search and inspection, and using the information to revise my expectations of my first home.
Commitment: Once I have found the property that I would like to buy, I would need to do some due diligence to see whether the property is right for me and if there are any faults or dealbreakers.
Execution: Once the property is okay for me to buy, I would need to read and/or sign a contract, either negotiate a fair price or go to auction and undergo the settlement process once the property is purchased.
The PACE system as taught in the First Home Buyer Guide
The steps in the first two stages were very clear, highlighting the importance of research and self-reflection to understand the property market and what I need to consider when inspecting property. The course provided a lot of templates to keep track of who I have recruited in my support crew and to record whether I would buy recently sold properties so that I can calibrate my expectations of what I can buy.
What I learned from the course is that I don’t have to enter the property market right away by buying a cheap property that does not meet my long-term needs and does not have much market demand. Instead, if I have sufficient borrowing capacity and patience, I can stretch myself and buy a first home that might be expensive but would suit my needs in the long run and would be easier to sell as it would attract plenty of potential buyers.
On the other hand, the steps in the last two phases were a bit messy as I was confused of what I can do before and after I sign a contract depending on whether it is a private sale or an auction. This is something where I would need to do further research and ask more questions and guidance from my support crew. Nevertheless, the steps in the last two phases gave me an overview of how to use my research to negotiate effectively and what happens after I purchase the property so that I know when I can move into my first home.
I also received a lot of freebies in purchasing the course, namely a book on buying property at auction, a question board to ask questions to the course facilitators and a 30-day free trial of live Q&A sessions where I can receive guidance live. The 30-day free trial is something that I will activate later on once I have identified a few properties that I am thinking of buying, but I will make use of the book and the question board now while I start searching for property.
Overall, the course has been worthwhile in understanding what is involved when buying property. The steps taught in the course are not only useful for buying my first home, but also set the foundations for researching and buying investment property later on in my life.
What else did I do?
Going off the First Home Buyer Guide, I am starting to bring together my support crew that will support me in my home buying journey. I did some research on mortgage brokers, property solicitors, conveyancers and property inspectors that I could recruit as part of my support crew. At the moment, I am making appointments with two mortgage brokers to learn more about my borrowing capacity and ways to expand it. These mortgage brokers would not only search for the right home loan for me, but would also structure it in a way that gives me flexibility of buying investment property in the future. Knowing my borrowing capacity would allow me to decide whether to start looking at property or not.
In preparation for my meeting with mortgage brokers, I calculated how much money I earned and spent in 2023. I found that I had enough money to cover the weekly essentials and fun stuff, allowing me to save a huge proportion of money towards my first home. At the same time, I found that I could save even more money to increase my deposit and to cover the costs of buying my first home such as inspections and conveyancing fees.
As a result of inspecting my spending and saving habits, I have slightly modified my cash flows between my bank accounts so that I can save some money towards my first home while giving myself some money to spend on fun things and go on a domestic and Japan holiday over the next two years without feeling guilty. I will have plenty of excess savings, of which I will allocate a high proportion towards my first home, accelerating my savings.
Finally, even though I have not started looking at property, I am starting to walk around different suburbs in Melbourne. I am doing these tours to see what they are like, particularly how easy it is to walk to shops and the train station, and whether I would live in them. Over the past two weekends, I have done a tour of two adjacent suburbs within eastern Melbourne, looking at what homes, shops and public transport are like in these suburbs. I will do more suburb tours around Melbourne over the next few months to expose myself to different areas where I might live. This suburb research would put me in good stead in knowing what property I could buy when I start looking at property.
What’s next?
As for what’s next, I am still planning blog posts on ways to save money towards a first home deposit. Currently, I am planning to write a blog post on the First Home Super Saver (FHSS) Scheme, an initiative where one can save money towards a first home deposit via super. I have been using that scheme for the past 1.5 years, so I have some knowledge of how the scheme works and my experiences of using that scheme. I haven’t started writing it up yet, but I intend to recollect information on the FHSS and start planning that blog post so that I can write it up soon.
