Why saving for a mortgage has become a struggle

While the recent back-to-back rate cuts have made home loans cheaper as they sent mortgage rates to uncharted territory, many borrowers still struggle to save for a deposit. What could be driving this phenomenon?

The low interest-rate environment seems to be a double-edged sword — while it keeps mortgage rates low, it also diminishes the benefits of saving, CoreLogic analyst Cameron Kusher said.

The high interest-rate levels made it difficult for people in the early 1990s to save for home-loan deposits as mortgage rates peaked at 17%. However, deposit rates at that time hit as high as 16%, encouraging more people to put their money in the bank.

Looking at the current trends, both mortgage rates and term deposit rates are at historic lows — standard variable mortgage rates are recorded at 4.94% and 12-month term deposit rates are 1.65%.

"While a current potential buyer may be looking to save for the mortgage, they aren't getting the assistance from higher interest rates that they may have in the past," Kusher said.

Another consideration is the employment situation in Australia. In the early 1990s, unemployment reached as high as 11.2%. While this is considerably higher than today's 5.2%, the male and female participation and underemployment rates were lower than the current figures.

"Although the unemployment rate was much higher in 1992 than it is today, there were fewer females in the workforce. Individuals that had a job were more likely to be getting as many hours as they wanted compared to today's workers, particularly younger workers, the ones most likely to be trying to save a home deposit," Kusher said. "The fact that female participation has lifted so much over recent years also points to the fact that saving for and paying off a mortgage increasingly requires more than one income."

Inflation is also a significant concern. Currently, Australia's inflation rate is at record low levels. Kusher said higher interest rates typically accompany higher inflation — when consumer prices are increasing more rapidly, the real value of mortgage diminishes, he said.

"Given this, higher inflation should lead to mortgagees being able to pay off their mortgage quicker. While this doesn't necessarily impact on those people saving for a deposit, it does mean that once they take out a mortgage, paying it off is relatively easier with higher inflation than it is with lower inflation," he said.

With the current situation, Kusher believes improving potential first-home buyers' access to the market has become extremely difficult. While the recent value declines would improve housing affordability over time, he said saving for a mortgage is still the hardest part of the process.

"In saying this, it still doesn't really address the challenge that saving a deposit continues to be the biggest hurdle and low interest rates look to be in place for a number of years to come," he said.