Saving a decent deposit may be the biggest hurdle facing people trying to buy their first home.

However, the current mix of ultra-low interest rates and government policies that favour homeowners is making life especially hard for people saving a deposit, as opposed to those who already own a property and are paying off a loan. Advertisement

For a household with average income, it takes a record eight years to save up a 20 per cent deposit for a typically priced Melbourne home, recent ANZ analysis found.

It is even worse in Sydney, where it takes a whopping 9.2 years, a near record for that city.

Expressed another way, the share of annual income needed for a deposit for a median-priced home is at a record high, as this week’s graph shows.

It is a different story for people who already have a home loan, thanks to the plunge in interest rates.

The RBA has said households with new home loans are spending a lower share of their income on mortgage repayments than the average over the past decade.

The uphill battle facing people trying to save a deposit is being made worse by record low interest rates, and a tax system that tends to favour home ownership.

Not only have record low interest rates put a rocket under house prices in Sydney and Melbourne, saving is harder because bank deposit interest rates have been slashed.

Making things even tougher, the interest earned on a savings account is taxed at the marginal rate, so after inflation there’s a good chance you’re going backwards.

Someone who already has a home loan, in contrast, can use an offset account to, in effect, earn an interest rate equal to their mortgage rate. This will inevitably be higher than a bank would pay on deposits.

The money held in an offset account is deducted from the mortgage when the bank is calculating monthly interest repayments.

In effect, it means a homeowner can earn an interest rate equal to their mortgage rate, which might be a bit less than 5 per cent today. What is more, that is an after-tax return.

There have been some attempts to help people save deposits more easily, such as first home saver accounts, a Rudd government initiative that gave people saving a deposit tax breaks and co-contributions from government.

However, these were scrapped from July, after disappointing take-up rates.

Groups such as the Customer Owned Banking Association argue policymakers should look at revisiting some sort of scheme to help first home buyers save up a deposit more tax effectively.

With home ownership and all the financial advantages it brings moving more out of reach for many, it is a good argument that deserves serious consideration.

Posted by Clancy Yeates – The Age on 5th August, 2015