There’s a restart to Super and First Home Buyer schemes: but are they a good idea?

Two major government schemes restart today as the new financial year begins, but comparison site RateCity.com.au is warning Australians to think before they jump in.  recession-australia-note-money-economy-squeeze-tighten-save-saving-budget-cut

From July 1, eligible Australians financially affected by COVID-19 will be able to access up to $10,000 extra from their superannuation.

Round two of the First Home Loan Deposit Scheme also starts today, when a further 10,000 places become available to buyers with as little as 5 per cent deposit.

However, research from RateCity.com.au shows people need to be aware of the hidden costs of both schemes.

COVID-19 Early access to Superannuation

Already 2.4 million Australians have applied to access their super, averaging $7,492 per person, according to APRA.

From today, eligible people will be able to pull out up to $10,000 again. Superannuation

But does it make financial sense?

A 30-year-old who takes out $10,000 now will have an estimated $21,516 less in retirement, according to ASIC.

If they take out another $10,000 after July 1, they would have a total of $43,032 less in retirement.

The long-term cost of accessing your super early

Age Cost of withdrawing

$10,000 at retirement

Cost of withdrawing

$20,000 at retirement

30 $21,516 $43,032
40 $17,512 $35,024
50 $14,253 $28,506

Source: ASIC. Assumes income of $50,000 and retirement at 67. See full assumptions at the end.

RateCity.com.au research director Sally Tindall said:

“Superannuation is there to support Australians in retirement. Before you raid your nest egg again, think carefully about the long-term implications.”

“If you’re thinking about accessing this scheme, ask yourself, is there another way? Talking to a financial counsellor might help you think of alternatives to get you through.

“If you have no alternative but to tap into your super, try to put the money back when you’re on your feet again to minimise the long-term fallout,” she said.

Tips if you do access your superannuation again from July 1:

  1. Call a financial advisor or counsellor for independent advice.
  2. Make sure you meet the criteria. There are fines of up to $12,600 for misleading claims.
  3. Come up with a plan to put the money back into your super as soon as you can.
  4. Take as little as possible and use the money wisely. This is your nest egg. Don’t see it as an opportunity to buy a new TV.

First Home Loan Deposit Scheme

From today another 10,000 places will become available in the federal government’s First Home Loan Deposit Scheme.

Under this initiative, 27 lenders, including big four banks CBA and NAB, are allowing first home buyers to take out a mortgage with as little as 5 per cent deposit, without needing to pay lenders’ mortgage insurance.

But buying a home with a 5 per cent deposit, as opposed to a 20 per cent deposit, can be more expensive.

RateCity.com.au research shows a person buying a $500,000 property with a 5 per cent deposit, instead of a 20 per cent deposit, would need $75,000 less initially.

But with a larger loan, their mortgage repayment would be $395 extra a month and they would pay $67,067 in extra interest to the bank over 30 years.

This is based on taking out CBA’s basic home loan at a rate of 3.13 per cent for an owner-occupier paying principal and interest.

Sally Tindall, research director at RateCity.com.au said:

“In these uncertain financial times, where unemployment is on the rise and property prices are on the decline, borrowing with just a 5 per cent deposit can be risky.”

“Falling property prices come with both opportunities and risks. People might find they don’t need to spend as much and their deposit, as a percentage of the property price, has actually gone up.

“However, there’s a risk that property prices will fall even further and people who buy with a wafer-thin deposit could find themselves in negative equity if they’re not careful,” she said.

Monthly repayments and interest paid on a $500,000 property

  20% deposit 5% deposit Difference
Deposit size $100,000 $25,000 $75,000
Loan size $400,000 $475,000 -$75,000
Monthly repayments $1,641 $2,036 -$395
Interest over 30 years $190,922 $257,989 -$67,067

 Notes: Based on CBA’s basic home loan for owner occupiers paying principal and interest with a rate of 3.13% for a loan-to-value ratio (LVR) of more than 80% and a rate of 2.79% for an LVR of 80% or less. Calculations are based over 30 years and do not include fees or stamp duty. Assumes LMI is $0.

Potential pros:

  • Avoid lenders mortgage insurance.
  • Get into your home sooner.
  • Stop paying rent.
  • Prices could rise after you purchase your property.

Potential cons:

  • Higher monthly repayments.
  • Pay extra interest over the life of the loan.
  • Some lenders charge higher interest rates for people with small deposits.
  • Property prices could drop, potentially leaving you in negative equity.

Eligibility criteria:

  • People must earn less than $125,000 a year for singles, or $200,000 a year for couples. Wages are based on your earnings from the last financial year.
  • Never owned a property.
  • Owner-occupier requirements apply.
  • You must be an Australian citizen and over 18. Permanent residents can’t apply.

First home deposit loan scheme – property price caps

State Capital city and regional centres Rest of state
NSW $700,000 $450,000
VIC $600,000 $375,000
QLD $475,000 $400,000
WA $400,000 $300,000
SA $400,000 $250,000
TAS $400,000 $300,000
ACT $500,000
NT $375,000

Source: https://www.nhfic.gov.au. The capital city price caps apply to regional centres with a population over 250K.

For other islands and territories not listed see govt website.

SUPERANNUATION NOTES: The estimates provided use the assumptions and default values from the Superannuation Calculator based on an income of $50,000.

  • The estimates provided are shown in today’s dollars, which means they are adjusted for inflation by 4.0% p.a. (2.5% p.a. due to the rising cost of living [CPI inflation] and a further 1.5% p.a. for the cost of rising community living standards).
  • Investment returns are defaulted to an assumed rate of investment return before tax and fees of 7.5% p.a.
  • Investment fees are assumed to be 0.85% p.a.
  • Assumed tax on earnings is 7.0%.

Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

Metropole

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Kate Forbes

About

Kate Forbes is a National Director Property Strategy at Metropole. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
Visit www.MelbourneBuyersAgent.com.au


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