It has been reported that the Federal Government is considering a new strategy to make it easier for first home buyers to accumulate the a deposit by allowing young people to access some of their superannuation savings. The Australian reports ‘Under the proposal, first-home buyers would be able to access an amount from their banked employer superannuation contributions equal to their voluntary top-up payments, which could then be used as a deposit on a first home’.
As superannuation is intended for saving for retirement, and for the majority of Australians will not accumulate enough superannuation to self fund a retirement, I was somewhat sceptical as to whether this would be a good policy. Before I get into my analysis of this policy let's start with a quick run through of the benefits our tax system offers to the family home and to superannuation.
Home ownership in Australia.
The way that our tax system is structured at present any growth in the value of your home is exempt from capital gains tax, this makes it a very attractive asset to hold.
Generally, interest on your personal mortgage is not tax deductible and so there is an incentive to repay this debt as fast as possible, by accessing a portion of your super will increase your deposit and reduce the total interest cost of your mortgage.
Where you do not have a deposit in excess of 20% plus costs you can expect to incur Lenders Mortgage Insurance (LMI) which can be very expensive, access to super may reduce this cost or allow you to buy sooner than you otherwise might and avoid LMI all together.
Concessional contributions to super (those made by your employer and those your salary sacrifice) are taxed at a reduced rate of 15% compared to your marginal tax rate (19% - 45% + Medicare Levy)
Earnings on investments within super are concessionally taxed at a rate of 15%
Can be withdrawn after 60 as a tax free income source (limited to the $1.6m cap)
As there are clear benefits to both contributing and accumulating wealth in super as well as your own home I have looked at what benefit there would be to accessing super for a house deposit compared to the current scenario faced by first home buyers.
James is a 21 year old University graduate with no savings. He has just started a job and is paid the average full time salary for a male in SA of $76,596 (plus 9.5% super). He has the average cost of living of a single SA household under 35 of $40,752. As an average guy he dreams of buying a house for the median price in SA of $437,500 Not including stamp duty or title transfer fees. As he has no deposit at present the value of his house is expected to grow by 4.19% (the average over the past 10 years) and the associated purchasing costs will grow along side this as seen below:
To work out the benefit of the proposed policy I have considered 3 scenarios:
James is unable to access his superannuation, he saves his cash-flow surplus in a high interest savings account paying a dismally accurate 1.5% until he has saved the required sum to fund a 20% deposit plus costs.
James is able to access his superannuation under the proposed policy, he matches his employers contributions to his super funds and saves the remaining surplus as before. When he has a large enough balance in his super and savings he withdraws it and buys a house.
James is not able to access his super but as he is also impatient he buys the house at the same time he would in the super scenario and cops the LMI on the chin.
In each of these scenarios I have assumed James directs all future cash-flow to the mortgage and once it is repaid he then contributes the surplus to super.
Where James saves the 20% deposit personally it will take him 8 years meaning he is unable to buy the house until he is 29. The Median house at this point will cost him $607,556 to buy plus another $31,940 in government levies. It will then take him 23 years to repay and he will spend a total of $308,278 in interest over the life of the loan.
Where James is able to access his super he will only have to save for 5 years and can buy his house at 26. As this is three years sooner the total cost of the house including govt. levies is $74,824 cheaper than if he is forced to wait. As it costs him less money to purchase he is also able to repay the mortgage in only 20 years saving him $76,699 in interest.
Where James is not prepared to wait to save the full 20% deposit and buys it at 26 as he would have be able to under scenario 2 he will only have a little over 12% of the value of the house saved, to get the loan he then pays an additional $6,589 in Lenders Mortgage Insurance. When compared to the time to repay the loan it is similar to the first scenario however as he has a larger loan the total interest is $12,693 more than if he had waited and saved the full 20%.
Of course this isn't the full story, withdrawing from your super to fund the purchase of your own home is going to impact your retirement right?
If James were to contribute his surplus income to his superannuation once he had repaid his mortgage he would have an additional $134,000 (in today's terms) when he retires at 60. This is due to a number of factors including that he would have repaid his mortgage at an earlier age allowing longer to contribute, he paid less interest over the life of the loan, and it cost him less to buy the house in the first place.
Where I was initially sceptical about accessing super to fund the deposit for your house, it is clear to see that where used appropriately this could be a great policy allowing those that have just started their working lives the opportunity to live the Australian Dream and own their own home.
If you have any questions or thoughts about this I would love to hear from you. At the same time if you have any questions about your own finances or you are interested in reviewing strategies that may help you buy your house or pay it off sooner I would love the opportunity to discuss this with you.
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It is important to note this policy has not been formally announced and as such this is just a case study based on unsubstantiated information of what it may involve.
All information provided is of a general nature and does not take into account your current financial situation, needs or objectives. We recommend you obtain financial advice specific to your situation and consider prior to making any financial decisions.