Should first home buyers access their super for a new home?

Should first home buyers access their super for a new home?

Home ownership is a wish for many Australians. Some make it a reality, while for others it remains a dream. 

Residential property prices increased 1.7 per cent over 2014’s first quarter across Australia’s eight capital cities and territories, according to the Australian Bureau of Statistics. However, growth was higher in Sydney (2.3 per cent) and Melbourne (2.1 per cent), putting pressure on those looking to take out a home loan and buy their own properties.

While cutting down on everyday spending can make saving up for a home deposit easier, it’s easy to wonder if there’s a better solution as house prices climb. For instance, should first home buyers tap into their super savings in order to get their foot on the real estate ladder?

Independent senator offers “super idea”

Nick Xenophon, South Australian Independent Senator, has suggested would-be homeowners should access their super in order to obtain a slice of the property pie.

The senator will introduce legislative changes when the state’s parliament goes into session this spring that will allow first time buyers to use a proportion of the super savings towards a deposit for a home loan, after being inspired by a similar Canadian scheme.

Mr Xenophon said:

“With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year.”

What are the existing options for Australians?  

Currently, Aussies can purchase property via their self managed super funds (SMSF).

However, such properties must be purchased as an investment, meaning fund members can’t live in the homes themselves, according to the Australian Securities and Investments Commission. This means that Aussies saving for their future can build up their investment opportunities, but they might still be out of pocket when it comes to purchasing their very first home.

SMSF property can be a smart option, given the inherent tangibility and understandable nature of real estate. However, Australians may find themselves locked out of their more immediate desires – namely, home ownership.

Should Australians use their super to buy property?

super-property-resized-compressor

There are certainly benefits to using super to buy property. For one, everyday Australians will be able to build up their home equity in their properties.

If Mr Xenophon’s proposed legislation passes into law, housing affordability could improve if the Canadian system is anything to go by. Of course, housing affordability is dependent on a range of factors, making such outcomes difficult to predict. 

The flipside of utilising super to pay down a home deposit is that retirement plans could be negatively affected. Once Australians turn 65 and meet the Department of Human Services’ income and assets test, they’re eligible for the age pension. 

As of 2014, the fortnightly pension rate (after accounting for the maximum pension supplement and the energy supplement) was just $842.80 for a single person or $1,270.60 for a couple (visit the Department of Human Services for the most recent pension rate figures).

If people want to keep up their lifestyle or retire early (or both!), they’ll need a significant amount stashed away in their super to make up the shortfall. Capping the amount available for a home deposit could be a compromise, to ensure individuals don’t adversely affect their retirement plans when looking to step onto the property ladder.

RateCity Data Insights Director, Peter Arnold, said: 

“In my opinion it’s yet another band aid solution for high house prices, except more detrimental than first home buyer grants, as essentially it’s the same, but funded by first home buyers’ future well-being as they pay for it out of super.”

“The accumulation phase of super – typically the first-home-buyer time of life – is very important to retirement income, so taking money out at this point has serious future implications.”

So – the verdict is mixed! If you’re looking to buy property, be sure to run a home loan comparison.

First home buyer home loans

 

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A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

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The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.

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Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

What is appraised value?

An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

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For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

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