Using your super for a home deposit – is it a super idea?

If you’re considering accessing your super to get a home sooner, it could help to understand the risks, what requirements might apply and whether it’s even possible in your situation.

So far, billions of dollars  have been paid to Australians through the COVID-19 Superannuation Early Release Scheme, according to Australian Prudential Regulation Authority (APRA) statistics. As well as slashing stubborn credit card debt, Australians have splurged cash from their super on a range of other purposes, including on discretionary items such as clothing, furniture, restaurant food, gambling and alcohol, according to a recent study by advisory firms illion and AlphaBeta.

But what about bricks and mortar? For some Australians who are eligible to withdraw their super, putting this cash towards a home deposit might seem like a savvy idea. But is it really? And what about the First Home Super Saver Scheme that’s specifically designed to help people buy their first property? Canstar explores:

Can I withdraw and use my super towards a home deposit?

Generally speaking, superannuation is designed to help people save for their retirement. However, there are a number of circumstances where a person might be able to access part or all of their super for other purposes. In some situations, this could include using the funds to help fund a home deposit.

The First Home Super Saver Scheme

The First Home Super Saver Scheme (FHSSS, also known as the FHSS scheme) was introduced in 2017 to help first home buyers get into the property market faster by allowing them to save within their super. Eligible individuals can then apply to withdraw those voluntary super contributions, and put those funds towards buying their first home.

According to the Australian Taxation Office (ATO), the amount you can withdraw will depend on how much you’ve contributed to your super fund, whether the payments were concessional or non-concessional (i.e., whether they were made before or after tax) and how much your contributions have earned in investment returns. If you’re eligible, you can withdraw up to $30,000 in voluntary contributions from your super through the scheme.

COVID-19 early release of superannuation

Perhaps more controversially, some people may be tempted to access their super under the temporary COVID-19 hardship measures introduced by the federal government and use the funds to help purchase a home.

According to the Australian Taxation Office (ATO), the intent of the COVID-19 Superannuation Early Release Scheme is to “support people who are adversely financially affected by COVID-19, and need help to meet expenses”. Penalties may apply if you withdraw your super and you are not eligible.

Additionally, some mortgage brokers have said that if applicants have accessed their super this way, they’ve declared themselves in financial hardship, and by doing so, should be barred from getting a mortgage due to responsible lending laws.

That said, it’s been reported that some applicants have successfully put super withdrawals towards a home deposit, though this may be down to the applicants having a sufficient deposit already, as well as a demonstrated pattern of saving. Such applicants may have only used their super funds as a ‘top-up’ for an existing deposit.

What are the risks of withdrawing my super through the early release scheme?

Saving for a home deposit within your super by making extra contributions through the FHSSS may be a relatively safe option because the scheme was designed specifically with that purpose in mind. However, withdrawing super funds which had been intended to be used in retirement, such as under the COVID-19 hardship rules, and using them to fund a home deposit, could be a significantly riskier option, both in the short and long term.

Perhaps the most notable risk is the erosion of your super and the loss of potential investment earnings compounded over time.

Canstar Research has shown, for example, that a 30-year-old withdrawing $20,000 from a superannuation balance of $40,000 may incur a $83,699 loss on their retirement account balance in the long-term. This hypothetical scenario would involve an individual withdrawing $10,000 in the first round of withdrawals before 30 June, 2020, as well as $10,000 once again between 1 July, 2020, and 31 December, 2020.

Broken egg full of coins in a nest
Source: Cowardlion (Shutterstock)

Setting aside the hit to your super balance, some lenders might not consider money from your super to be a satisfactory part of a deposit. You may be required to show evidence of ‘genuine savings’ to be considered a suitable applicant for a home loan.

What are genuine savings and why are they usually required for a home loan?

Mortgage brokers and banks may be wary of applicants looking to use money from their super as part of their home deposit. Applicants may not have the required ‘genuine savings’ to be eligible for a home loan, or a lender may refuse the home loan application of someone who has accessed their super due to financial hardship, because of responsible lending laws.

Genuine savings include money you’ve saved over a period of time, from sources such as:

  • Money accumulated or held in a bank account in your name for at least three months
  • Funds withdrawn from your superannuation account under the FHSSS
  • Term deposits and/or shares held for at least three months
  • Proceeds from the sale of investments such as shares, held for more than three months
  • Consistent loan repayments with accelerated payments made for at least three months
  • Equity in residential property or proceeds from the sale of property

If you withdraw money early under temporary COVID-19 hardship rules, Financial planner Stuart Wemyss explained to Canstar that you may need to hold onto those funds in a savings account in your name for over three months for them to be considered ‘genuine savings’. Even then, a bank might only approve a loan if the financial situation which made you eligible to access your super early had also improved.

While a limited number of lenders may consider applicants without genuine savings, even potentially higher-risk home loans, such as 95% home loans, usually require applicants to show genuine savings of at least 5%, in addition to meeting wider borrowing criteria.

What are the pros and cons of withdrawing super for a home deposit?

Here are some of the potential pros and cons of using your super towards a home deposit, to further help you decide whether it’s right for you or not.

The pros of using super as a home deposit

  • It could help you enter the property market sooner.
  • Buying a home earlier in your life could see you retire with a smaller or no amount owing on your home, as opposed to waiting longer to buy and retiring with a larger home loan balance to pay off.
  • Boosting your home deposit with money from your super could help you avoid having to pay lenders mortgage insurance (LMI) if it pushes your loan-to-value ratio (LVR) to 80% or lower. A lower LVR could also help you to secure a better rate on your loan, depending on the lender.

The cons of using super as a home deposit

  • Taking money out of your super at a young age could mean you you end up significantly worse off at retirement than you would have been, if you had left the money where it was.
  • If you withdraw your super to contribute towards a home deposit, you could still have difficulty being approved for a home loan if you can’t show genuine savings, or a history of saving.
  • Because this is a time of economic volatility, you could end up using your super to buy an asset that drops in value in the short to medium term.

Is it smart to cash in my super for a home deposit?

Your personal financial circumstances will determine whether taking money out of super to put towards a home makes sense or not, according to Canstar money expert, Effie Zahos.

“For some people, this is an opportunity to get on the property market, but if you’re in genuine financial hardship, you’ll have a hard time getting approved for a home loan whether you’ve got an adequate deposit or not,” Ms Zahos said.

She also said that potential buyers should think long and hard before deciding to access their super.

“Before taking any money out of my super, I’d be asking myself, ‘Are there any other options?’ ‘Do I have to take this money out?’ ‘What’s the impact of accessing my super early?’ and at the end of the day, ‘Does it make financial sense?’,” Ms Zahos said.

“And if you’re considering taking money out of your super to put into property, another question you should be asking is ‘Is that property likely to outperform my super fund?’”

“If you can answer all these questions, you’ll be able to figure out whether accessing your super early makes financial sense for you.”

Accessing your super early is not a decision you should take lightly. As well as the FHSSS, you may also consider applying for the First Home Loan Deposit Scheme, or simply wait until you’ve built up a deposit made entirely of genuine savings. You may also seek out free financial advice or consider financial counselling.

This article was co-written by James Hurwood. It was reviewed by our Sub Editor Jacqueline Belesky before it was published, as part of our fact-checking process.

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