Taking $50,000 out of your super to buy a house: Good idea or big mistake?
You might soon be able to access $50,000 from your super for a deposit for your first home, but just because you can, does that mean you should?
The Liberal Government has announced a last-minute policy ahead of the federal election this week called the Super Home Buyer Scheme. Under this newly proposed scheme, if elected, the government would allow first home buyers to withdraw 40% of their super, capped at $50,000, to put towards a home deposit.
The government says the scheme will help young people get into the market sooner. However the policy has received a lot of criticism from the opposition, economists and the super industry itself.
According to Industry Super analysis this scheme could inflate property prices even further, and potentially see the median price in Sydney increase by $134,000. Even the current minister for superannuation Jane Hume said, "We know that people will probably bring forward some of their decisions to buy a house earlier and for that reason it will probably push prices temporarily."
If re-elected, the policy would start as early as July 2023. If you're a first home buyer, should you consider withdrawing 40% of your super to put towards a home deposit?
Is withdrawing from your super a smart move or big mistake?
The initial, obvious benefit of taking up this scheme is that you could potentially get your first home sooner. Accessing up to $50,000 from your super is a huge chunk of your deposit, and you only need to have saved 5% of the deposit yourself to access this scheme.
However, this scheme is unlikely to benefit as many people as it seems. The average 25-35 year old male has $41,600 in super, and women in the same age group have even less at $31,000. This means, on average, men would be able to access $16,680 and women just $12,400. To access the full $50,000 you'd need a super balance of $125,000.
There's also the impact on your super balance that you need to consider. The money you withdraw from your super while you're in your 30s could be worth more than double by the time you retire, thanks to the power of compounded returns in your super fund. That $50,000 now would be worth well over $100,000 or more if kept in your super fund until you retire.
Making an early withdrawal from your super would also hit young people the hardest, because the younger you are the more time you have to benefit from compounded investment returns.
The other thing to note with this scheme is that if you sell the home, you need to return the money you took out from super back into your fund plus the associated capital gains earnings. This would be a good way to replenish your super balance, but it means you wouldn't be able to use that money or the associated earnings to help fund your next property purchase. Of course if you're planning to stay in your first home forever, this wouldn't be an issue for you.
Super rules are constantly changing: Keep up with the latest superannuation changes with our guide.
Potential to impact the super balances of all Australians
As well as impacting your own super balance, Industry Super Australia said this policy would reduce the retirement savings of all Australians. "Not only will it lock young people into hugely inflated mortgages without any requirement for their own deposit, it will torpedo investment returns for everyone leading to everyone having far less at retirement," said Industry Super Australia chief executive Bernie Dean.
Super funds would need to have a lot more cash on hand to cater for these withdrawals. This means super funds might be forced to reduce the amount of high-risk, high-growth assets they hold in favour of low-risk, low-return assets like cash, which would also reduce the investment earnings of all members' portfolios.
How this policy compares to the First Home Super Saver Scheme
It's also worth noting that you'd be able to use this policy as well as the First home Super Saver Scheme. This scheme also allows you to access up to $50,000 from your super, but it's only for voluntary super contributions you make on top of your employer contributions.
Adding extra money into your super to benefit from the tax concessions and investment returns then withdrawing it for a deposit is very different from withdrawing $50,000 of your current super balance. The first policy means your mandated employer contributions are still safe and untouched and continue to grow, but this new policy would allow you to pull out your employer contributions that you've built up from working.
Whether you want to withdraw from your super or not, there are ways you can start to boost your balance right now. If you've got multiple super funds, consolidate them to stop paying unnecessary fees. Compare super funds and pick one with low fees and strong returns (you can change super funds quickly and easily online).