Why dipping into your super is a bad idea

It’s hard to imagine that fewer than half of all Australians will own their own home in the next few years. But with stagnant incomes, an increasing population and soaring house prices, it’s a harsh reality that many people have to face. So, what options are left for first home buyers?

What our overseas counterparts are doing

One strategy is to dip into your super to help raise more capital. Sounds like a good idea, right? In fact, Canada is already doing this with its Home Buyers’ Plan that allows residents to withdraw up to $25,000 from their retirement fund. Our neighbours across the ditch also have a similar initiative called Kiwisaver, where the government even contributes the first $1000 towards your deposit. So why aren’t we doing this? Let’s look at the pros and cons of this approach.

The good

By accessing your super, you obviously have a bit more money to play with and this puts you in a better position to enter the market. And with prices only rising, you want to get in as soon as possible.

The not so good

Dipping into your super sounds like a good idea now, but when you’re at retirement age, you’ll have a lot less to retire on. It might be nice to have your own home, but when you’re retired with next to no money, you might not be able to afford to leave the house. In fact, many Canadians have been unable to repay any of the amount withdrawn from their retirement funds.

If people begin dipping into their super now, it puts pressure on higher contribution rates. Super withdrawals en mass means employers will have to make higher contributions to super, which means less money in your pocket each month. And again, less money for retirement.

If everyone dips into their super then it simply brings us back to square one, only housing would now be more expensive because everyone has more money to spend.

A happy medium

There is an option for using your super that currently exists called the Self Managed Super Fund (SMSF). When you set up a SMSF you take on the responsibility of all the investment decisions and compliance with super and tax laws. But the fund must still remain as an investment into your retirement, i.e. you can’t simply buy anything you want with it. What this allows you to do is get into the property market sooner, but only from an investment standpoint. You can’t live in the property. That is illegal. It’s not the answer that most first home buyers will be looking for but it at least gets you into the property market and over time you can use the extra income generated from that investment to put towards the deposit of your first home.

For more information about investing in property via your SMSF – or to learn more about getting into your first home – speak to Your Loan Solutions today!

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