Should first time buyers be able to fund their deposit from their super?

For many years now I’ve been advocating a fair go for first time buyers hoping that the federal and state governments would come up with ways to help more of them get a foot onto the proper ladder.

It’s tough being a first time buyer and its getting tougher.

Recent figures from the ABS point to subdued first time borrower activity with less than 1 in 8 home loans being made to this cohort and with average loan values up by almost 5 per cent year on year.

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This may seem like a small percentage increase but its adding over $10,000 to the average loan, meaning the average price paid has probably gone up by around $12,000 to $13,000. And of course there’s all that extra interest to pay.

Finding the cash to put down a deposit is one of the biggest obstacles facing aspiring home owners and with the cost of living and property prices going up, the deposit gap is getting bigger and bigger.

Therefore any approach that helps them save a deposit, or gets them one quicker, would be a real boon. And one way of doing this, which is getting a fair bit of publicity and exposure at the moment, is to give first time buyers access to their superannuation savings.

I know this 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. Superannuation is about wealth creation and having enough money to live on during our twilight years.

But in the meantime we also have to have somewhere to live, and remember, property is a great way to create wealth. So by providing access to super it would be possible to achieve our retirement goals and own where we live at the same time, which in turn would provide major short and long term social and financial benefits.

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Apart from enabling first time buyers to enter the market sooner, there would be a number of other benefits, including:

• Greater equity in their property at time of purchase

• Cost reduction – less interest due to lower borrowings and savings on lenders mortgage insurance. Both of these could add up to tens of thousands of dollars which could be at least equal to or greater than what the equivalent amount may have earned if it remained in super

• Improved affordability without the federal and state governments having to dip into the public purse to fund grants and concessions

• Help level the playing field with investors

• Help all first time buyers, not just those eligible for government grant

Of course, there are some downsides to consider as well, chief among these being:

• Property prices could be pushed higher due to increased demand with no corresponding movement in supply

• Withdrawals early in the savings cycle could dampen individuals’ superannuation fund growth due to the compounding effect of earnings. (See my earlier column: The power of compound interest)

Notwithstanding the risks I’m sure there is a way to make such a policy initiative work. After all, countries like Canada, Singapore and New Zealand seem to have effective schemes in place with Singapore boasting a 90 per cent home ownership rate.

There would however, need to be certain safeguards in place which could include the following:

• Limiting how much could be withdrawn – perhaps capping the figure at $25,000 or $30,000 per person. (As an aside, if two first time buyers drew on their superfunds they could contribute between $50,000 to $60,000 in total which would represent a significant deposit on an average purchase price of $400,000).

• Requiring any withdrawals to be repaid over a set period – say somewhere between ten and twenty years.

• Setting very low interest rates on amounts withdrawn – ideally zero to help reduce the combined home loan and superannuation repayment burden.

• Limiting fees (if any) super funds could charge in the administration of withdrawals.

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• Setting a minimum age or time in super as a way to help build up reasonable super balances and help ensure that not all superannuation balances are withdrawn.

I think we are at a point where we need to think outside the box and 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.

Of course, another way of really helping new home buyers is to boost supply and remove punitive taxes, like stamp duty, But that’s another story.

Peter Boehm is the Consulting Finance Editor with onthehouse.com.au which offers a unique information source on virtually every property in Australia and provides data on a property’s sold and rental history as well as current property valuations. The onthehouse.com.au Investor Centre provides research on suburbs, market update reports and calculators to help investors make informed property decisions.