SASS Wise

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.

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 2021, 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 the retirement income phase of 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.