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Can You Use Your Super As A Deposit?

Young woman with hammer behind back thinking about smashing her piggy bankShould Australians be allowed to dip into their superannuation for the deposit on their first home?

Treasurer Joe Hockey recently floated this idea when speaking with Sunrise‘s David Koch last Friday and it has since roused the ire of members of the Labor Party and former Prime Minister Paul Keating.

“I get a lot of people approaching me saying that young people should be able to use their superannuation to fund a deposit on a home – on their first home,” Treasurer Hockey said.

“We are prepared to look at a diverse range of proposals to help young Australians buy their first home.”

The comments come months after Independent South Australian Senator Nick Xenophon announced his support for such a scheme.

According to the Senator, a Canadian scheme which allows first home buyers to release up to $25,000 in superannuation funds to purchase a property, has led to improved housing affordability in the country and he believes that a similar scheme should be introduced in Australia.

The Senator’s announcement comes after John Oliver, chief executive of the SA Government’s HomeStart Finance, recently told a Senate Economic References Committee in Adelaide about the success of the Canadian scheme which has been active since 1992.

“As HomeStart Finance said today, there’s something strange about being able to access your super fund if you’re about to default on your housing loan, but you can’t access it to put a deposit on a home in the first place,” he said.

Xenophon added that taking a similar approach to Canada would make a difference to the lives of many thousands of Australians each year.

“Of course, it should not be the only proposal, and there needs to be other measures that need to be considered to make housing more affordable,” a representative from Xenophon’s office recently told Home Loan Experts.

“To date, Nick has received quite a few responses, from those how don’t support the idea, those who support the idea for first homeowners and those who believe the idea should be extended for anyone who does not yet have their own home.”

It’s no great surprise that trying to hop on the Aussie property train is a challenge, particularly with housing prices continuing to outstrip the average incomes of young Australians trying to save for a deposit.

According to the most recent estimates from Australian Property Monitors, the median house price in Sydney has hit $812,000, a 17 per cent over the year to June 2014.

This was followed closely by Melbourne which grew by 10 per cent to $608,000 over the same period.

We here at Home Loan Experts understand the pain that first home buyers are feeling but is dipping into one of the other great Australian assets, your super, the way to go?

It’s definitely risky, that’s for sure, and the Association of Superannuation Funds of Australia is against allowing Australians to access their super for the purposes of a housing deposit. Lenders may also see this proposed scheme as risky but for different reasons.

Your borrowing power could be affected

If the law does pass, lenders may not consider your super release as genuine savings, accumulated savings that add up to 5% of the purchase price and are required when borrowing more than 90%.

“The number one issue for me is capacity,” Home Loan Experts senior mortgage broker Tina Pham said.

Taking the scenario of a couple currently paying rent, Pham said weekly mortgage repayments are usually double the amount you’d have to pay in rent each week. If you can’t demonstrate that you can save more, lenders are seriously concerned that you won’t be able to afford to pay back the loan.

The only way our brokers can work with lenders to get you approved is if there are good reasons as to why you haven’t been able to save enough for a deposit, she added.

“For example, if your wife just returned back to full time work and this is reason why you haven’t been able to save enough,” she said.

“Another reason is a recent separation or if you can provide evidence that you’ve recently paid out a large credit card debt or personal loan.”

Of course, our brokers go through this due diligence process if you apply for a home loan with a gifted deposit from your parents. Yes, this option does already exist!

Some banks can even waive the genuine savings requirement if someone is renting and has a good track record of making their repayments in full and on time.

The super release is like a personal loan

Another problem you might be faced with is that since the amount you pull from your super will likely need to be paid back within 15 years, as is currently the case in Canada, the lender will have to factor into their serviceability calculation whether you can repay the amount without undue hardship.

Using super to buy a property also shoots down your retirement exit strategy and the Government should really consider this before making any decisions, Pham said.

“After 40 years of age, your loan term is going to be reduced and you’ll use your super to pay down your mortgage,” she said.

“I think the only people [this scheme] would work for are people aged 30 to 40 such as those who have started a family and returned back to full time work.”

Also missing out on this proposed legislative change are people aged less than 30 who generally wouldn’t have enough in their super to release up to $25,000 towards for a deposit, particularly if they’re still studying, and the self-employed, who won’t have any super to withdraw anyway. Only a very specific type of first home buyer would potentially benefit from this scheme.

You still may not have enough to buy a home

As a rough guide, customers need a minimum of 9% of the purchase price in New South Wales to buy an existing home. To buy a new home it is typically 2-3% of the purchase price needed as a deposit so your super on its own may not be enough to get into the property market.

On the flip side, some in the financial services industry have suggested that the Government should allow first time buyers to borrow up to $100,000 from their super for a 20% deposit!

Their logic is that the Australian property will continue to rise steadily over the life of a 30 year mortgage. History has shown us otherwise and we believe that this is irresponsible.

What if there is a downturn in the market and at the same time you are forced to sell your home due to divorce or the death of a loved one? It’s not unlikely that your property could drop by $100,000. All of a sudden, you’ve lost this huge amount from your super.

Xenophon’s representative said that the Senator is working on a series of proposals, whilst also obtaining feedback from as many people as possible.

“Nick has been in contact with associations representing superannuation funds that are highly critical of the proposal and is engaging with them in the context of developing the proposal”, the representative said.

“Nick is acutely aware of the problems with the Canadian scheme and believes those issues ought to be taken into account in developing any such proposal in an Australian context.”

The bottom line is, if you’re trying to save for your first home, don’t pin your hopes on another hair-brained plan to increase housing affordability. Speak to us instead.

Our brokers are experts in getting home loans approved for people who have little or no deposit.

Small deposit home loans

Although no deposit home loans have been removed from the market, you can still borrow 105% of the purchase price with a guarantor loan.

You can also avoid paying lenders mortgage insurance (LMI), a once off fee payable when your loan is advanced. This can save you literally thousands off your mortgage.

So how does it work?

A guarantor – usually your parents – will provide a guarantee on your mortgage secured by their property.

Once you have paid off part of your loan or your property has increased in value then you can apply to remove the guarantee.

Again, some of our lenders will accept a gifted deposit from your parents.

There are more sure fire ways to buy a home with a small deposit, so if you’re struggling to save a deposit, please call us on 1300 889 743 or fill in our free assessment form today.

Let our expert mortgage brokers start you on the journey to home ownership with solutions that best suit your needs.