With home-loan affordability getting worse, increasing numbers of potential home buyers are finding themselves in the rental market.

While they might not own the four walls around them - something Australians find more comforting than people in a lot of other countries - the upside is they could be living in a nicer place and area than they would be able to afford to buy in and may actually be able to save money.

The latest Real Estate Institute of Australia housing affordability report says that, while the proportion of family income required to meet home loan repayments was 39.8 per cent, only 25 per cent of family income was required to meet rent payments.

In June 2008 the Australian weighted median rent for three-bedroom houses was $316.10 a week, while the national average loan repayment in June 2008 was $2177 a month, or $544.25 a week.

Taking these figures, the saving on weekly repayments alone of $136 could be used to build up other investments or put away to build a deposit to buy a house.

Of course the amount anyone can hope to save will depend on their income, how much rent they are paying and the lifestyle that they enjoy.

Saving alternatives

Some options for saving include just opening a separate high interest-paying bank account and having a set amount of money automatically debited into that account.

Although comforting in the current turbulent market environment, money in the bank is not actually working for you in the same way as growth or income-paying assets like shares. But if you have a short investing time frame and think you may need the money in a year or two, an online savings account or term deposit is definitely worth considering.

Shares

While the current financial market turmoil might make talking about borrowing to buy shares totally ludicrous - it may not actually be that silly for someone looking to build capital over time. Think five to 10 years at least.

Market volatility is part of investing and, just as sure as financial markets go down, they rebound. And investing when stockmarkets are at their lowest point in several years could prove to be a smart decision.

Mike Ingham, a principal consultant with Melbourne-based financial advisers Godfrey Pembroke Camberwell, says instalment gearing can be a very effective way to build equity in an investment portfolio without taking big risks.

Essentially you match the regular amount you contribute or save with a matching amount you borrow through a margin loan. You then make regular investments in listed shares, property trusts and/or managed funds. The income earned from your investments will contribute to the payment of the loan interest on the money borrowed.

Over time the capital value of the portfolio will hopefully increase and the borrowed amount can be paid off, leaving the investor with an equity portfolio that continues to grow in value.

The rate of growth will depend on how much is invested, in what assets and for what period.

Ingham says a person's time horizon is critical to their investment choice.

"A five to seven-year time horizon is preferable for growth assets like shares and strategies like instalment gearing," Ingham says.

People who borrow to buy an investment portfolio generally can claim a tax deduction for their borrowing costs.

Managed funds

If you're not sure about direct investing, managed funds might be a good alternative. Many funds offer savings plans but make sure you find one that invests in a range of shares. Balanced funds offer a diversified mix of asset classes as well.

Using the ASIC managed fund calculator (www.fido.gov.au) an initial investment of $1000 and contributions of $7000 a year ($136 a week saved through renting) invested in a growth fund earning 8 per cent a year after management costs could accumulate to $36,300 after five years.

Mortgage by proxy

Case study

LOUISE NEALON, 32, is renting a unit in the Bondi street in which she hopes to buy her own place.

The decision to rent and save money is part of a deliberate strategy to build a bigger deposit to buy her own apartment in two years' time, in an area she knows and loves.

"Earlier this year I went to see a financial planner when I had a 5 per cent deposit, which I thought was better than nothing to start with. Basically, he told me I was between 12 and 24 months away from buying a property comfortably if I was prepared to keep renting for the next two years," says Louise, the joint managing director of public relations firm Callidus PR.

"So, for the next two years I have to stick to a budget and at the end I will have a 20 per cent deposit. Hopefully property prices will continue to come down in that time."

The plan is that the money she is paying in rent and saving will also be the equivalent of the mortgage she has to pay, so these two years will be like a trial.

Louise says a bonus to the "pretending to pay a mortgage" strategy is she gets to test whether she will be able to meet the future financial commitment.

"In two years' time the mortgage repayments won't be a shock because they will have become part of my lifestyle," Louise says. BINA BROWN