A super way into property ownership?
By Peter Hunt
Using superannuation savings to provide the deposit as a means of entering the housing market appeared to have been put back into its box but seems to have escaped again, with the likes of Scott Morrison spruiking the idea. As someone who recently joined the ranks of the self-funded retirees, believe me, for peace of mind you need two things in retirement; a secure, well maintained roof over your head and a reliable modest income (assuming you have or can adopt modest life style). One without the other is useless and relying on making a bumper profit from ‘downsizing’ on retirement is a high risk strategy.
Using Super to overcome the barriers to property ownership can work though, providing you use someone else’s, e.g. your parent’s super. Think about it, by the time young people are ready to enter the housing market many parents will have been paying into super for over 30 years and should have a reasonable balance. At this stage wisdom has it that you should ring-fence at least part of your savings by placing them into less risky investments, and what better than a mortgage for someone you know and love (presumably). Whilst the Banksters pay depositors at best about 3% they offer mortgages at 5.5% and generally much more. Why not cut the Banksters out of the loop and lend direct? 5.5% matches or beats the return on most super funds ‘conservative’ funds.
As a partner will most likely be involved and no one can be sure that the partnership will last the term of the loan a legal charge should be created to ensure the safety of your funds just in case the relationship goes bad but apart from that it’s win win.
In the UK in 2016, it was estimated that “The Bank of Mum & Dad” was helping to finance 25% of mortgages to tune of £5bn making it a top 10 mortgage provider (Press Association, Tuesday 3 May 2016 07.45 BST). Unfortunately, given current Australian house prices few parents will be in a position to lend the full amount required and the Banksters will insist on having the primary charge on the property, but at least the rate and total interest paid to these criminals can be reduced by lowering the amount borrowed from them. If the LNP really wanted to do something to help Gen Y into property perhaps they could address this, e.g. creating special rules giving super funded loans equal status to the banks loans. Beware, in the UK the Banksters worried at losing out are offering special deposit accounts where, if parents deposit a certain amount at minimal interest, they, the banks, will provide a full cost mortgage to their children. Why would you?
Of course the sensible solution would be to address one of the main causes of soaring house prices by tackling the issues of negative gearing and capital gains tax discounts but as the ALP has proposed this sensible approach, the LNP have to rubbish it just as they did with the NBN, replacing the ALP’s high speed fibre to the home with an antiquated, high cost, low speed mongrel solution that is currently being ripped out and replaced with full fibre in countries like Germany and the UK. Or carbon pricing, the best option to tackle CO2 emissions according to just about every expert in the field. The LNP have taken Australia from world leaders to laggards and are an embarrassment with their ‘clean coal’ fantasy, passing lumps of coal around the floor of parliament. Carbon capture and sequestration can work, it has been perfected by nature over the last 300 million years, it’s called coal and massive amounts of carbon can be sequestrated safely, indefinitely, by leaving it in the ground so that our children and theirs can enjoy a good life on a healthy planet in their family group funded homes.
(This article is the opinion of the author only and does not constitute financial advice).
6 comments
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Keitha Granville -
Matt -
Terry2 -
Terry2 -
king1394 -
RonaldR
Return to home pageWelcome to the world of the retiree – you are going to need every cent you have managed to scavenge !
Aside from negative gearing and CGT – ONE house only allowed, no more. After 1 you are a property developer making money. Why is that taxpayers’ money ?
And for the would be home owners – instead of insisting on a deposit of 10% which for many on low incomes might as well be $1 million, change the rules. If a couple have been paying rent on time and in full for 3 years THAT should be all the security they need to secure a mortgage which will have a repayment amount less that that rent.
Simple.
Thanks Peter,
The truth is that super is already used to buy property – it is used by people who self-manage and also the big funds who invest in apartment projects etc. This already pushes up the price of housing. Think about this – how much does a young couple spend on rent and or interest over their life while they wait for their super? If they buy now, probably millions of dollars – these savings alone would be enough retire on. Also are these savings more than they earn by having their money tied up in a fund? On top of that, even if it does add heat to this crazy market, then surely that increases the value of their asset, so under mainstream thinking regarding super this is still a good investment due to the capital gain. Finally, the main thing in retirement is that you need to own your own home, then you do not need much to live on.
But I believe the most sensible thing is to abolish super, wind up the funds, give the money back to people and let them save for their own future and then give a pension to those who need it whilst encouraging home ownership. Encouraging home ownership implies getting rid of houses as a financial investment, i.e no negative gearing, implement CGT for investment houses (not the home you live in) and take housing out of the casino economy – prices will drop, the older generation will not be stealing wealth from the younger generation and investment money will pour back into the real, productive economy – which will provide the money and economic basis for the pension system. Our current system is a complete ponzi system and there is not much of a real underlying economy – the main real economy we have is building houses for each other (all based on massive debt) and digging up resources (something that global warming says cannot continue).
As it is however, those warning against super for housing are possibly right – the other necessary changes will not happen – the wealth of investors will be protected, and super could well used to just keep the ponzi system going a little longer.
It could be possible to use the equity held in a superannuation fund, by an individual or a couple, to encourage a lender to accept that equity as collateral and thus reduce the deposit necessary to buy a home.
The only foreseeable problem is if there is a default on the loan and insufficient equity in the home to cover the remaining loan balance.
A lot has been said recently about the Singapore system of compulsory saving – the Central Provident Fund or CPF – providing all employees with a realistic retirement and welfare fund but several points need to be made.
The CPF is a government run fund into which employers pay 17% currently and employees pay 20% , a total of 37% for all employees under 55 years of age – the fund and its returns are government guaranteed.
I addition, the government provides cash grants of between $30,000 and $50,000 to ‘couples’ and this goes towards securing an apartment through the government controlled Housing Development Board (HDB) where the resale prices of apartments are controlled by government – more information here : http://www.straitstimes.com/singapore/housing/singapore-budget-2017-first-timer-couples-to-get-more-subsidies-when-buying-resale
There is simply no comparison at all between the Singapore situation and that prevailing in Australia.
As Terry 2 says there is a foreseeable problem which is that if you lose your house, you also lose your super. It is not unheard of for people to lose their house. Many people have no buffer to allow for payment of the mortgage should they lose their job, or have their hours cut – lose their penalty or shift allowances for example. The breakup of marriage unfortunately leads to the loss of the family home quite often; how do you untangle the super component in the property settlement? And when the value of the home increases substantially, which is the gamble that investors are taking, there is often the temptation to borrow further for anything from new cars to holidays. All can come to grief should the market drop or interest rates go up.
http://cecaust.com.au/pubs/pdfs/flyer/20170407_Economic_Armegeddon.pdf