The younger Generation (Gen Y) have become disillusioned when it comes to Home ownership; for many, it appears out of reach. So how do first home buyers enter the market today? How do they raise the 25% deposit on the median price property including associated costs like stamp duty (apartment or house)?
It certainly is a lot more difficult today than it was over 45 years ago, where 25% ‘purchase costs’ of the Sydney median house price in 1970 was $4,675 ( = $18,700 x 25%) . At that time, it was approx. 1 years’ salary, whereas in 2016 the ‘purchase costs’ for a median house price in Sydney is $248,000 ($995,000 x 25%). That’s approx. 4 years’ salary.
What this means is that its four times more difficult today than over 45 years ago to save for a deposit and stamp duty costs. Granted, the average home loan rates are much lower, today than they were back then, but you still can’t get around the fact you need to save more, for longer, to get a foothold into today’s market.
It’s important that we enable the younger generation and first home buyers to enter the market and have the same opportunities that we enjoyed. Besides the obvious strategies of stamp duty relief and first home buyer grants; there has been little else offered by our politicians to alleviate the pressures younger Australians feel with respect to owning their own home.
I believe the solution could be hiding in plain sight …Superannuation.
Superannuation assets in aggregate were $2,146 billion at the end of the September 2016 quarter, slightly up from the previous quarter which were $2,100 billion and now at an all-time historical record level. Over the 12 months to September 2016, there was a 7.4%increase in total superannuation assets.
The government has always keep a tight rein on what superannuation funds and their members can invest into. They have not allowed members to access funds until they reach retirement age and rightly so. However there have been exceptions; the government has allowed people in financial difficulty or in times of extreme hardship to access their superannuation funds only after providing appropriate evidence and seeking ATO approval. My proposal in allowing first home buyers to access their super to assist with the purchase of their first property is just an extension of this philosophy.
As previously mentioned, the largest impediment to entry in the housing market is saving the 25% deposit for the purchase price including costs such as stamp duty legal fees and borrowing costs.
“First home buyer deposit reserve”
The younger generation see superannuation as irrelevant to them, retirement is too far away and they pay little or no attention or become disillusioned with the concept. The government could change the culture and mindset of these people along with their views on superannuation. They could incentivise the younger generation by offering tax concessions to encourage them to contribute more into their superannuation. If the government allowed tax free status for employee contributions and made it into a special “First home deposit reserve” account inside their superannuation fund, they could use this for up to the first ten years of their employment. By doing so, this would encourage savings especially if they knew they could access these funds to buy their first home.
10-year fixed interest loan from Super.
The first home buyer could access the funds by way of a 10-year fixed interest only loan from their superannuation fund. The first home deposit reserve account assists with the initial deposit of 25% to acquire their first home. The interest rate on this loan would be calculated at the then current market fixed rate and the interest Capitalised. The principle and interest would be payable at the end of the loan period.
Going one step further; I would also allow by way of a similar loan to the first home buyer access to their 9.5% employer contributions for a period capped at 5 Years after the purchase of their first home. .This would assist the first home buyers with their monthly mortgage payment . Access to this assistance would be means tested and capped at a salary level that is reasonable.
This would need to be strictly monitored ,the total loans including capitalised interest would need to be repaid in full in 10 years. By then the capital growth of the property would enable a refinance to repay the superfund the amount owed.
Let’s look at an example with some assumptions based on today’s numbers.
Let’s assume the First home buyer has been working for 10 years and has a partner.
Based on employer contributions made to their superannuation fund over the 10 years and growth; the balance could be $100,000 between the two. So let’s also assume they both took advantage of tax free contributions to the “first home deposit reserve” account and further contributed $5,000 each over the same ten years. That leaves a balance of $200,000 in their ” First home buyers deposit reserve” that they could draw as their first home buyers loan from their superannuation fund.
The property they wish to purchase is $800,000 including stamp duty and costs. The loan from their superfund could be up to $200,000 for the initial 25% deposit (potential 2 people $100,000 each). Interest rate charged at current commercial rates (say 4.5% fixed) and payable on completion of 10-year loan period. The interest would be approximately $110,000 over this 10-year period.
From a cash flow perspective, mortgage payments on a $600,000 loan over 30 years principle and interest would be $36,000 per annum.
If the government allowed the first home loan owner access to 9.5% employer super contributions, the first 5 years will assist with paying the mortgage assuming a salary cap of $80,000 @ 9.5% = $7,600 x 2 = $15,200. Therefore, per annum mortgage costs for the first 5 years would be $20,800 pa ($36,000 less $15,200).
Now let’s look forward 10 years when the loans are due to be paid back in full to the superfund.
Value of property is $1,600,000 (Australian property historically doubles every 10 Years) the bank debt balance after 10 Years repayments based on current rates would be approx. $462,000.
Refinance the mortgage to add $386,000 (original deposit $200,000 plus employer contributions of $15,200 x 5 years = $76,000 plus capitalised interest of $110,000) to pay back the respective superannuation funds. Total new mortgage now would be $848,000 but the property is worth $1,600,000 and the first home owner now has higher income and stable footing in the property market and life.
The rules surrounding access to the loans need to be carefully managed and the administration of the strategy would need to be strict to reduce abuse of the system.
Managing the commercial loan agreements and the registration of these documents between the super funds and the first home buyer is one area that would require strict oversight. The government will have to work closely with the banks to protect guarantees and the principle loans made by the super funds so the property cannot be transacted or offered for other security purposes without formal release letters from the government, bank and or the superannuation fund. This will protect the principle loan to the member to ensure the asset is protected and monies are paid back to the super fund in ten years’ time.
In summary, my proposal is as follows:
Allow first home buyers access to their superannuation balance by way of loans to use as deposit on their first property purchase.
Incentivise young people to save for their deposit by allowing tax free status for employee contributions into a newly formed “first home buyers deposit reserve” within their super fund for first 10 years of employment and capped at $5,000 pa therefore maximum $50,000.
Allow first home buyer access to employer contributions for the first 5 years of the loan to assist repayment of mortgage, the amount should be capped at a reasonable salary level.
Loans are repaid in full with interest to the superannuation fund after 10 years.
Government and banks work together to protect securities and facilitate refinance in 10 years to repay superfund.
What are your thoughts about this? Do you think superannuation could be a viable solution to the ‘first home buyer affordability’ problem?
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Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.