Australians who’ve suffered financially during the COVID-19 pandemic are able to access some of their superannuation to help them get by. Perhaps unsurprisingly in this property-obsessed country, some people are pulling out their super and using it to buy property.
Now from that start, it’s important to note that anyone eligible to withdraw their super under the current rules is likely to be in financial stress and probably shouldn’t buy property. But the rules are flexible and there are no restrictions on how you use the money once you’ve accessed it.
Is using your super to buy a property a good idea? Probably not. Can it work for the right buyer? Potentially.
Here are the facts.
How does early super access work?
Eligible Australians can access up to $20,000 of their superannuation ($10,000 last financial year and another $10,000 this financial year) if they are unemployed, on a JobSeeker payment, made redundant this year or suffered a 20% reduction in work hours or business turnover (if you are a sole trader).
But if you didn’t access any super in the last financial year you can only access $10,000 this year.
Theoretically, an eligible couple could withdraw $20,000 of their super this financial year to use as part of their deposit to buy a house.
This could make up a significant chunk of a deposit on a property. But it’s much harder to get approved for a home loan if you’re in financial difficulty.
There are some cases where you could qualify for early super withdrawal and buy a property. Whether this is a wise financial choice is much harder to say.
Enter the property market faster
Saving a deposit is one of the biggest challenges for Australian home buyers. A typical 20% deposit on a $700,000 property is $140,000. But with a low deposit home loan it’s possible to buy a property with 10% deposit or even a 5% deposit.
For a $700,000 home, a 5% deposit is just $35,000. Hypothetically, being able to access $10,000 (or $20,000 for a couple) in extra cash through your super makes saving that deposit a lot easier.
While withdrawing super is reducing the money you’ll have to cover your retirement costs, getting your foot on the property ladder faster also makes financial sense.
Once you own a property and you’re paying it off, you start building equity – and the value of your property will hopefully grow over time, too. Whereas if you were still paying rent, you wouldn’t be getting anywhere.
Take advantage of government support while you can
There are a number of government schemes available to first home buyers right now. While you should never rush to buy a home before you’re ready, taking advantage of these schemes could work in your favour.
The First Home Loan Deposit Scheme allows eligible borrowers to buy homes with just a 5% deposit while avoiding the extra cost of lenders mortgage insurance premiums. However, the scheme has a limited number of places available.
There are other schemes like HomeBuilder, which offers grants of up to $25,000 for eligible buyers. This scheme is also available for a very limited time.
Withdrawing some super to get your deposit over the line faster, so you can take advantage of one or more of these schemes, could save you money or give you more (if you qualify for a grant), or both.
There are a couple of very obvious reasons why withdrawing your super early will cost you more in the long run or work out negatively.
Accessing your super now will reduce your retirement savings
Your super might not look like much money now, especially if you’re young. But over time it is designed to grow substantially. Withdrawing even $10,000 now means losing more in the long run, potentially tens of thousands.
That’s money you will need for your retirement.
Also, your superannuation rises and falls depending on the market. If you withdraw $10,000 when your super fund is performing badly you will miss out on future growth.
You might be eligible to withdraw super but not be eligible for a home loan
You’re only allowed to access your super early under specific financial circumstances. And these are the same circumstances that make it harder for you to get a home loan.
If you’ve lost your job or your income has fallen substantially then your chances of getting a loan approved are lower. This is especially true if you’re trying to extend your borrowing power as far as it can go to buy your dream home.
You run the risk of withdrawing your super only to find yourself unable to finance the purchase.
Now if the property you’re buying is relatively cheap and you’re still earning a regular but reduced salary, you could both qualify for super withdrawal and get a home loan. But a lot of buyers won’t meet both requirements.
Timing the market is rarely worth it
If you’re rushing to withdraw super in the middle of a recession solely to take advantage of falling house prices, stop and think again. Doomsday predictions of big price drops are a worst case scenario.
So far, property prices have proved surprisingly resilient. According to CoreLogic’s September figures, even where prices have fallen in Sydney and Melbourne over the last quarter, they are still up compared to the same time last year.
This may change, but timing the market rarely works out well for the ordinary buyer. The best time to buy is when you’re in a good position to buy and you’ve found a property that suits you at a price you can afford.
You do have other options if you can’t, or don’t want to, access your super early to buy property.
First Home Super Saver Scheme
If you’ve put extra money into your super you are able to access this money to serve as a home loan deposit. Because it’s extra money you’ve invested into your super voluntarily, taking it out won’t impact your retirement savings as much.
And you don’t need to be in financial distress to access it.