Being a first time buyer in today’s market is tough with the situation showing no signs of improvement.
Recent figures from the ABS state that less than 1 in 8 home loans are being made to first time buyers, with the average loan value up by almost 5% year on year.
While this increase might seem small, it is adding over $10,000 to the average loan. This means that prices have also risen, probably by about $12,000 to $13,000. Not to mention all of the extra interest that will need to be paid over the life of the loan.
I have been advocating a fair go for first time buyers for many years now, in the hope that the federal government and state governments would come up with a way to help more of them get a foot onto the proper ladder.
Finding the cash to put down a deposit is one of the biggest obstacles aspiring home owners face today. As the cost of living and property prices continue to go up, the deposit gap keeps growing bigger and bigger.
Therefore, any approach that can help aspiring buyers save a deposit would be a great advantage. One way to do this, which is getting a fair bit of publicity and exposure at the moment, is to allow first time buyers access to their superannuation savings.
This method might go against the grain of those who think super should only be used for retirement, and for the most part I agree with this viewpoint. But, in the meantime, we also need a place to live and property is a great way to create wealth.
Providing access to super would make it possible for people to achieve their retirement goals and own their own home at the same time. In turn, this would provide major short term and long term social and financial benefits.
There are a number of benefits of allowing first time buyers to access their super:
- Greater equity in their property at time of purchase.
- Enter the market sooner – by allowing first time buyers access to their super, this will reduce the time it takes for them to save up a deposit.
- Cost reduction – lower borrowings means paying less interest and saving on lenders mortgage insurance. Both of these can add up to tens of thousands of dollars, which could be equal to or greater than what the equivalent amount may have earned if it remained in super.
- Improved affordability – providing access to super would increase the amount of funds first time buyers have to fund a home purchase, without the federal and state governments dipping into the public purse to fund grants and concessions.
- Level the playing field – give first time buyers a fair chance against investors, and help all first time buyers – not just those eligible for government grants.
As with most scenarios, there are downsides to consider. The main concerns include:
- Increases demand – property prices could be pushed higher due to increased demand with no corresponding movement in supply.
- Early withdrawal – Individuals’ superannuation fund growth could be effected by withdrawing early in the savings cycle, due to the compounding effect of earnings.
Notwithstanding the risks, I’m sure there is a way to make a policy initiative like this work. After all, countries like Canada, Singapore and New Zealand seem to have effective schemes in place with Singapore boasting a 90% home ownership rate.
Certain safeguards could be put in place to manage the policy, which could include the following:
- Set a limit – limiting how much could be withdrawn from super by capping the figure at, for example, $25,000 or $30,000 per person.
If two first time buyers were purchasing a home together, this would allow them to access $50,000 to $60,000 in total from their super, which would represent a significant deposit on an average priced home.
- Repay withdrawals – require any withdrawals to be repaid over a set period (somewhere between 10 and 20 years).
- Low interest on withdrawals – set a low interest rate on withdrawn funds (ideally zero) to help reduce the combined home loan and superannuation repayment burden.
- Limiting fees – don’t allow super funds to charge large administration fees on withdrawals. Ideally, there would be no fees associated with this withdrawal.
- Age requirement – set a minimum age or time in super so a reasonable super balance has been built up to help ensure that not all superannuation balances are withdrawn.
We have reached point where we need to think outside the box when it comes to helping first time buyers enter the property market.
Being able to call upon superannuation balances, within reason, could be a way of helping more Australians into their first home. It needs careful thought and consideration and some tight rules, but it just might work.