Saving for your first home deposit can seem daunting, especially in a competitive and over-priced real estate market like Australia's. However, with the right tools and strategies, you can accumulate a deposit efficiently while minimising financial stress. Two methods that have become popular are dollar-cost averaging into exchange-traded funds (ETFs) and leveraging the First Home Super Saver (FHSS) Scheme for tax-efficient savings.

This article provides a guide on how to combine these approaches to save for your first home deposit in a way that’s both strategic and cost-effective.

NOTE: While we like them, these strategies won’t be for everyone. Before committing, consider whether they align with your goals, and when in doubt, speak with a licensed financial adviser. Keep in mind that these strategies are higher-risk than saving a deposit in a savings account, but they also may deliver a higher return. As such, many risk-averse people simply park their deposit into a savings account. Consider which is right for you depending on your goals and risk profile.

Step 1: Understand dollar-cost averaging in ETFs

Dollar-cost averaging (DCA) is a simple investment strategy in which you invest a fixed amount of money at regular intervals, regardless of the market’s ups and downs. It can be particularly useful for those looking to invest steadily without the stress of timing the market.

Why dollar-cost averaging (DCA)?

The sharemarket is inherently volatile, and prices fluctuate daily. By investing at regular intervals (weekly, fortnightly, or monthly), DCA allows you to buy more units when prices are low and fewer when prices are high. Over time, this evens out the cost of your investments, smoothing out market volatility and reducing the risk of investing all your money at the wrong time.

Learn more: What is Dollar-Cost Averaging (DCA) and Why is it a Good Investing Strategy?

Why ETFs?

An exchange-traded fund (ETF) is a basket of securities – such as stocks, bonds, or commodities – that trades on a stock exchange, much like an individual stock. ETFs provide broad market exposure and are highly liquid, making them popular for long-term investments.

Some key reasons ETFs have gained popularity within the long-term investing community:

• Diversification: Instead of investing in a single company, you’re spreading your risk across many companies, industries, or even countries, which reduces exposure to the poor performance of any one asset.
• Lower fees: Compared to actively managed mutual funds, ETFs tend to have much lower management fees. With that said, always be sure to review an ETF’s fees before you invest.
• Access to growth markets: With ETFs, you can invest in entire sectors or markets, like the ASX 200 or international indices, which have historically shown long-term growth potential.

Something to consider before investing in ETFs for a home deposit

Like any share market investment, ETFs are subject to the market’s regular peaks and troughs. Should you need to sell your ETFs for a home deposit during a market downturn, you could end up with less money than you hoped for. Hence, it's important to have flexibility and a long-term time horizon for this strategy when investing towards a home deposit.

It may also be advantageous to keep some of your home deposit in a savings account while simultaneously considering investing in ETFs or the FHSS towards a house deposit. This way, you have a buffer for if the market dips at an inopportune moment.

How to dollar-cost average into ETFs

1. Decide on your investment amount and frequency

A critical part of DCA is consistency. Decide how much you can comfortably invest each month without sacrificing your ability to meet day-to-day expenses.

For example, if you commit to investing $1,000 per month into an ETF that tracks the ASX 200, you would continue this every month regardless of whether the market is high or low. Over time, this approach would help you accumulate more shares when prices are low and fewer when prices are high, potentially reducing the impact of market volatility.

2. Select the right ETFs for your goals

• Broad Australian market ETFs: If you’re looking for diversified exposure, a broad-market ETF like the BetaShares Australia 200 ETF (A200) or iShares Core S&P/ASX 200 ETF (IOZ) could align with your preferences. The ETFs above track the ASX 200 index, which includes the 200 largest companies in Australia, providing broad exposure to the Australian economy.
• International diversification: Adding international ETFs like the Vanguard MSCI Index International Shares ETF (VGS) would give you exposure to global markets. The aim is to reduce the risk of being overly reliant on the Australian economy.
• Diversified ETFs: Alternatively, you could sselect a single diversified ETF such as Vanguard Diversified High Growth Index ETF (VDHG) or BetaShares Diversified High Growth ETF (DHHF) . These are a type of ETF that provides a complete, diversified portfolio in a single investment. They are also known as “all-in-one ETFs”.

Learn more: What is a diversified ETF? Aren't ETFs already diversified?

3. Automate your strategy

DCA involves investing consistently, even when markets dip, as those moments can provide an opportunity to accumulate more shares at lower prices. Market volatility is also a normal part of investing.

To remove the hassle of manually investing, many DCA proponents automate their investments. If this sounds like you, consider choosing a platform (like Pearler!) with an Automate tool.

Learn more: How to automatically invest in shares and ETFs

Step 2: Understand the First Home Super Saver Scheme

The First Home Super Saver Scheme (FHSSS) is a government initiative designed to help Australians save for their first home using the tax advantages of superannuation.

By making voluntary contributions to your superannuation fund, you can potentially benefit from the low tax environment of super while building your deposit. With that said, each person’s tax situation is different, so to understand how it applies to you, speak with a registered tax accountant.

The FHSS allows first-time home buyers to save for a deposit by making voluntary contributions to their superannuation. This scheme aims to provide tax benefits, as an investor can make pre-tax contributions (salary sacrifice) or post-tax contributions, which are taxed at a lower rate than your marginal income tax rate. The amount one can contribute is capped at $15,000 per financial year, with a total cap of $50,000, at the time of writing.

How the First Home Super Saver (FHSS) Scheme works

1. Making contributions: You can make voluntary contributions to your superannuation fund for the purpose of saving for your first home. These contributions can be either:

• Pre-tax (concessional contributions): Salary sacrifice or personal contributions that you claim as a tax deduction, taxed at 15% within the super fund.
• Post-tax (non-concessional contributions): Contributions from after-tax income, which are not taxed within the super fund.

Contributions towards the FHSS must be voluntary; your employer's mandatory contributions (Superannuation Guarantee) don’t count.

2. Contribution limits: As mentioned above, the maximum amount you can contribute under the FHSSS is $15,000 per financial year.

The total maximum you can contribute and withdraw for the scheme is $50,000 per person (so $100,000 for a couple if both are using the scheme).

3. Tax advantages: Pre-tax contributions are taxed at 15% within a super account, which is generally lower than a marginal income tax rate, providing tax savings (but again, confer with a tax accountant for specific guidance).

Post-tax contributions aren’t taxed again in the super fund.

4. Withdrawing the funds: When you're ready to purchase a home, you can apply to the Australian Taxation Office (ATO) to release your savings under the FHSS. Currently, you can withdraw:

• 100% of your post-tax contributions.
• 85% of your pre-tax contributions (since 15% was taxed when the funds were deposited in the super).
• The earnings on these contributions.
  

Once approved, you will have 12 months from the date of the first withdrawal to sign a contract to buy or build a home. If you don’t, you can either request an extension, recontribute the funds back into super, or pay an additional tax penalty.

5. Tax on withdrawals: When you withdraw under the FHSS, the released funds are taxed at your marginal tax rate, minus a 30% tax offset.

Learn more: How can I benefit from the First Home Super Saver (FHSS) Scheme?

Check that you’re in a Performing super fund

Key to the effectiveness of your FHSS investments is the superannuation fund you’re investing in. You want to ensure that your fund is Performing, at a minimum.

The Australian Government has built a tool to do just this – YourSuper. The information displayed in the comparison tool is collated and supplied by the Australian Prudential Regulation Authority (APRA).

APRA has assessed the annual performance of each MySuper product. The investment performance column provides one of the following results for each fund:

• Performing – the product has met or exceeded the performance test benchmark.
• Underperforming – the product has not met the performance test benchmark.
• Not assessed – the product had less than seven years of performance history and has not been rated by APRA.

You may also want to consider switching to a higher performing superannuation fund than you are currently using. You can compare, consolidate and change super funds using this portal as well.

Step 3: Execute the strategy

Below is a hypothetical example of how you could combine DCA and FHSS to work towards a home deposit. Again, this hypothetical doesn’t take your personal circumstances into account, so for personalised insights, speak with a financial adviser.

1. Super contributions: Maximise your voluntary contributions to super under the FHSS. You can contribute up to $15,000 each financial year, and the potential tax advantages could make this a potentially effective way to save for your deposit.

2. Automatically invest in ETFs: Simultaneously, you could invest in a diversified ETF portfolio outside of super. This would potentially give you liquidity and flexibility in case you need access to your savings earlier than planned, or if the property market changes. However, as with all investments, returns are never guaranteed.

3. Diversify your risk: Having both super and ETF investments could mean you’re diversifying your risk. If the property market or economy shifts, you could still potentially have access to two pools of savings.

Conclusion

Under the right circumstances, dollar-cost averaging into diversified portfolios could help you save for a first home deposit. These portfolios could include your superannuation account (via the First Home Superannuation Scheme), and/or ETFs. However, the strategy which will work best is the one that aligns with your preferences. If that involves a mixture of the above, one of them, or neither, that’s completely fine.

Whatever you decide, we wish you the best of luck in your journey to your first home!