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SASS Wise

Money wisdom, tips and insights from the SASS community.

Last edition we asked if a low interest rate environment had left you better or worse off. 68% said you were worse off because of current rates. The results are not surprising. Low interest rates are good for borrowers and home buyers but not so great for savers.

While interest rates remain low, the same cannot be said for Australian property prices. In this edition, we discuss what low interest rates and high property prices mean for your retirement plan. We also take a look at the practical steps involved in helping children buy a home and what to consider if you are getting into the property market for the first time.


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What do high property prices and low interest rates mean for your retirement plan?

You may be thinking about ‘cashing in’ or taking on an investment property to make the most of a booming property market. We look at some key things to consider.

Following a challenging year of lockdowns and uncertainty, soaring property prices have been a surprising turnaround for homeowners. Latest figures from CoreLogic1 show that Australian house prices are rising at its fastest pace in 32 years. Median house prices in Sydney climbed to a staggering $1.2m after a $40,000 increase in May 2021 alone2. Prices in the capital cities have all reached a record high3, but regional areas have also jumped 11.4% over the past year4 as the pandemic inspired some people to trade city for country or coastal living.

As a homeowner, you may be wondering whether now is the time to ‘cash in’ or take on more debt to invest in property. Let’s look at some things to think about before making property decisions that could affect your retirement. 

Tapping into the equity in your home

The combination of low interest rates and strong property prices may mean you’re considering releasing some equity in your home. Equity is the difference between your property’s current value and any remaining loan balance. You might consider this strategy to fund home renovations, invest in more property, buy a new car, or give some early inheritance to the grandkids, for example.

One way to release the equity in your home is to ‘downsize’ which essentially means selling your current property and buying a home that is cheaper. Selling up at a time when property prices are high could leave you with a decent profit. If you qualify for the downsizer contribution, you may be able to put some of the proceeds of sale into a super fund outside of SASS and enjoy some tax benefits. Bear in mind that because downsizer contributions are added to your super balance, they will be included in Centrelink’s income and assets tests.

But if parting ways with the family home isn’t something you’re willing to do just yet, there are other ways you can access your home equity, such as through a home equity loan. By doing this you’re essentially borrowing against the equity in your property and taking advantage of the low interest rates on offer. Home equity loans can come as a lump sum of cash with a fixed interest rate, or a line of credit which works a bit like an overdraft facility.

Before you’re tempted by the prospect of some extra cash, make sure you consider two important questions first:

  • Do you have a plan for what to do with your money? Remember that what you spend now, you won’t have later. You could live 30 years in retirement, so you’ll need to manage your money carefully to make sure it lasts as long as you do.
  • Do you want to have your mortgage paid off before you retire? Increasing your debt will likely extend the time needed to pay off your mortgage. And the older you are, the less time you’ll have to re-pay it. Think about whether that’s something you’ll be comfortable with.

Buying an investment property

Low interest rates have reduced the cost of borrowing so you may be wondering whether to buy an investment property. After all, property prices are predicted to continue rising well into 20225. Whether you’re thinking about using equity in your home or cash you have in the bank, there are some pros and cons to weigh up first. On the plus side:

  • Building up your retirement savings - Property in Australia has proven itself as a relatively stable investment. The capital gains from investing in property could be a good way to build up your retirement funds over the long term.
     
  • Negative gearing - If your rental income is less than your mortgage repayments and other property related costs, your property will be ‘negatively geared’ and you may get some tax benefits.
     
  • Generating an income - On the flipside, if your rental income is more than your expenses, rental payments may provide you with a regular income through to retirement.
     

Buying property is no small decision, so you’ll need to bear these things in mind:

  • No access to your money - Selling property takes much longer than cashing in other investments such as shares. Before you tie more money up in property, you’ll need to be confident you won’t need to access it for some time. If you need to sell up sooner rather than later, the cost of buying and maintaining the property may mean it’s just not worth it.
     
  • Less diversified investments - One of the golden rules of investing is to keep your investments diversified. If you own your own home and an investment property too, you might find your investment portfolio too heavily skewed towards property rather than spread across other asset classes, such as fixed income or shares.
     
  • Property management - Do you want to deal with tenants, ongoing maintenance and any issues that come up? The reality is managing an investment property is hard work and it might not be something you want to take on in retirement. You could outsource this to an agent, but that won’t come cheap.
     
  • The risk of a vacant property - Most properties are vacant at some point, and so you’ll need to make sure you can keep up the mortgage repayments should your property be empty for some time. Having some money set aside to cover a few months’ rent is a must.

Property has always been the big Australian dream. But like all investments, there are drawbacks to consider. You could be missing out on other investment opportunities that provide greater returns or a regular, reliable income in retirement.

Like all good financial planning, it’s important to keep your long-term goals in your sights. With an Aware Super financial planner by your side, you can confidently weigh up your options and make well informed decisions for your retirement.

 

  

Buying your first home in retirement

Thinking about getting on the property ladder in retirement? We weigh up the pros and cons of taking your SASS benefit as a lump sum to buy a home to retire in.


A hot property market can mean great news for homeowners. But for some renters, rising prices can put the dream of home ownership out of reach. According to Australian Bureau of Statistics (ABS) figures6, home ownership in Australia has dropped from 70 to 66%, the lowest homeownership level recorded since 1994.

Studies have found that homeowners are typically better off in retirement7. With interest rates remaining low, you might be considering buying your first home in retirement. As a SASS member, one option you have is to take your SASS benefit as a lump sum when you exit and put the money towards a home. There could be some benefits in doing this:

  • A sense of security – Owning your own home in retirement could provide you with a greater sense of security as you age. Knowing that your home is yours for as long as you want it to be could make a big difference to your retirement.
  • Higher Age Pension payments – Centrelink will not include your home in the Age Pension assets test. Depending on your circumstances, this may mean you qualify for higher Age Pension payments if your money is tied up in a property.
  • No longer paying rent – With Australia’s strong property market performance, home ownership could be a great way to build your wealth. Instead of paying rent and someone else’s mortgage, you could be growing a nest egg to eventually pass on to children or grandchildren.
  • Making changes to your home – Once you own your own home, you have the freedom to make any modifications you need to live comfortably and independently as you age. This could mean you staying in your own home for most (or all) of your retirement.

Like all decisions, there is a flipside to using your super to buy a home:

  • Missing out on tax benefits - Taking your money out of super means you could miss out on tax benefits of the super system. Rolling your money into the retirement phase of super and setting up a retirement income stream such as an account-based pension, you pay no tax on your earnings and no tax on your income payments once you reach 60. This option also gives you the opportunity to enjoy a regular income for easier budgeting and more peace of mind in retirement.
     
  • Less money to invest elsewhere - Investing in property means you’ll have less money to invest in other assets (such as shares) that could potentially generate high returns and regular income for you to live on in retirement.
     
  • Locking away your money – Compared to many other investments, property is an ‘Illiquid asset’, meaning it often cannot easily be sold. Investing in property could tie up a large portion of your retirement savings, leaving you with less cash to fall back on. If you need to sell your property later, it could take some time to achieve your target selling price.
     
  • Buying property costs money – When weighing up whether to buy a home in retirement, think about whether you’re willing to take on the commitment of a mortgage. And don’t forget to factor in all the costs of buying a property. Stamp duty and legal fees for example could make a big dent in your hard-earned retirement savings.

Before making any big financial decision, it’s a good idea to get some help. An Aware Super planner can talk you through the pros and cons and help you make the right decision for you.

 

  

Retirement proof your money mindset

With a strong economy, rising house prices and a positive outlook for a pandemic recovery, now is a great time to recap on some investment fundamentals to help you keep a steady head.


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The bank of mum and dad: helping children buy a home

Just like property prices, parental contribution is on the rise. We cover some important things to think about before you help a son or daughter get on the property ladder.

As home ownership becomes increasingly difficult for younger generations, more first-time buyers are leaning on parental contribution to get on the property ladder. In the March quarter of this year, 60% of surveyed home buyers said they’d received financial help from parents8. According to one researcher, parental contributions now average more than $89,0009. The ‘Bank of Mum and Dad’ has grown to become Australia’s ninth biggest lender10, with a staggering $34 billion in loans.

As parents, there are different ways you can help with a property purchase, including going guarantor on a home loan, providing a cash gift or loan, or joint ownership on a property for example. If you’re planning to step in and help your children buy a home, there are a few risks to be aware of.

Case study: John and Leslie go guarantor on an apartment for their daughter

Jen is 34, single and working in the accounts department of her local council. She earns $80,000 p.a. and pays $300 per week in rent. She has managed to save a $40,000 deposit to put towards a unit.

Jen finds a unit to buy in Parramatta for $550,000. While she has enough savings to meet the 5% minimum deposit ($27,500), she doesn’t have the full 20% deposit needed to avoid paying $7,000 in Lenders Mortgage Insurance.

Jen asks her parents John and Leslie (age 67) to go guarantor on the loan for the remaining 15% deposit (a total of $82,500). Doing this means Jen doesn’t have to pay mortgage insurance, however it does put John and Leslie at risk if she can’t keep up with the mortgage repayments.

Things were going smoothly until a council restructure left Jen out of a job. It wasn’t long until she started to struggle to keep up with her $1,800 monthly mortgage repayments. The economy took a downturn and so did the housing market. The unit she owned decreased in value, to $520,000 which was less than the size of her loan ($522,500).

After three missed monthly repayments, the bank contacted guarantors John and Leslie to recoup the outstanding repayments. It was that or sell the unit and have John and Leslie make up the shortfall in the outstanding loan. After selling costs and a reduction in house prices were factored in, this could be as much as $50,000.

John and Leslie were retired and didn’t have a lot of cash in the bank. They knew that selling the unit would be extremely distressing for Jen. With the help of an Aware Super financial planner, they re-organised their finances and made arrangements to cover the mortgage repayments until Jen found a new job nine months later.

This case study is for illustrative purposes only. It is intended to provide general information only. It has been prepared and does not take into account your objectives, financial situation or needs. Seek professional financial advice, consider your own circumstances and read our product disclosure statement before making a decision. Past performance is no indication of future performance. Issued by Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, trustee of Aware Super ABN 53 226 460 365. Financial planning advice is provided by Aware Financial Services Australia Limited ABN 86 003 742 756 AFSL No. 238430. A wholly owned company of Aware Super.

Keeping the long term in mind

As we’ve seen with John and Leslie, going guarantor for their daughter led to some unexpected consequences. If you’re thinking about going guarantor or dipping into savings or home equity to help a son or daughter buy a home, it’s a good idea to keep some things in mind:

  • Funding your retirement for the long haul – once you retire and are no longer earning a salary, you’ll need to make sure you have enough money to live on for the rest of your life. Remember that you could live up to 30 years in retirement. Gifting a sizeable amount of money to your children will reduce your retirement savings and leave you with less money to generate income to live on.
  • Tax implications when withdrawing from super – using some of your super to help out with a property purchase means that you may miss out on potential tax benefits. While your money is in super, you pay no tax on your earnings and no tax on your income payments once you reach 60. When you make a withdrawal from super, that money will no longer be subject to any special tax treatment.
  • Your children’s ability to service their mortgage – while a cash gift or loan might help your son or daughter get a head start on their mortgage, it could create false optimism about whether they can really afford to service the mortgage long term. According to one housing analyst, buyers who receive cash gifts from parents are three times more likely to default on their loan in the next five years11. Making sure the mortgage is stress-tested against interest rate rises or a few months of unemployment can provide some extra peace of mind.
  • Putting your own finances at risk – as we’ve seen, going guarantor on your child’s mortgage means you ultimately become responsible for ensuring that the mortgage obligations are met. If your son or daughter can’t keep up with their repayments, the lender will be entitled to take their home - and yours if necessary – to recover the debt in full.
  • The impact on family harmony - money can cause stress and anxiety in even the strongest family relationships. And things get really complicated if your child’s relationship breaks down and their partner is entitled to a share of the money you have gifted. Getting things properly documented is one way to reduce the risk of conflict down the track. Be clear and put in writing whether you’re loaning or gifting money so there’s no misunderstanding about what you do or don’t expect back.

If you’re thinking about giving a cash gift or loan to your children, it’s also important to understand any Centrelink implications, and to structure the arrangement so that it does not break gifting rules.

 

  

The downsizer contribution explained for SASS members

The 2021 budget is proposing to lower the eligibility age for downsizer contribution from age 65 to age 60. So what exactly is the downsizer contribution and how does it work in practice?


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Questions from the SASS community

Download a roundup of the questions SASS members have asked us.


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