Is the new budget helping or hindering first home buyers?

Low rates increase the number of people who can qualify for a housing loan, and at the same time turbo charges their loan potential. Picture: Shutterstock.
Low rates increase the number of people who can qualify for a housing loan, and at the same time turbo charges their loan potential. Picture: Shutterstock.

It was a perfectly crafted election budget: full of goodies for everybody.

A welcome feature was the commitment to gradually raise compulsory superannuation to 12 per cent because this is often the only way poorer citizens can have a decent retirement.

However, I just dont get the hype about rules being relaxed to enable people over age 60 to downsize and contribute up to $300,000 each into superannuation from the sale of the house.

Think about it. The work test is being abolished from July next year, except for persons aged 67 to 74 who want to make personal deductible super contributions. This means most people will be able to contribute to super in some shape or form up to age 75, whether they are working or not.

The only limitation is that once you have $1.7 million in super you cannot make any more non-concessional contributions apart from the downsizer special contribution.

But the average retiring couple would be pushed to have $800,000 in super between them, so they could already both contribute $330,000 using the normal contribution rules. They don't need to access the downsizing contribution. The only winners from the new rules will be the wealthy, who have more than $1.7 million in super now.

But a bigger issue facing Australia is the thinking by both major political parties that something must be done to make housing more affordable. Yes, right now we are in the middle of an extraordinary residential real estate boom, but this has been caused by our Reserve Bank cutting rates to historic lows.

Low rates increase the number of people who can qualify for a housing loan, and at the same time turbo charges their loan potential. The rush started as soon as mortgage repayments became cheaper than rent, and of course, once a rush starts, everybody wants to jump on the bandwagon for fear of missing out. And so it goes on and on.

Every government initiative to help first-home buyers simply increases the number of buyers in the market fighting over a rapidly declining amount of residential housing stock. This feeds the vicious cycle of prices going up.

Lets face it, any asset is only worth what somebody is prepared to pay for it, and how much they are prepared to pay is governed by how much they can borrow.

This budget has also further increased the number of people who are eligible for a housing loan by enabling them to take part in the First Home Loan Deposit Scheme which is really a lottery allowing them to buy a home on a minimal deposit.

This was a disaster in Great Britain and may well become a disaster here. The interest rate cycle around the world is turning upwards, and at some stage homebuyers will face an increase in their mortgage repayments. This will put many under financial pressure, which may well cause a downturn in the housing market.

The government also announced that more money can be saved in the superannuation system for a deposit on the first home. Ill cover this in detail next week, but basically first home buyers can make additional personal contributions of up to $15,000 a year as a tax deduction, and then withdraw the money when needed to buy their first home.

The only good thing about it is the guaranteed 3 per cent earning rate while the money is in super. The sting is that the contribution loses 15 per cent going in and is taxed at marginal rates less a 30 per cent rebate on the way out. It's of small benefit to most first home buyers, especially when one considers the huge amount of paperwork involved to take part in it.

Noel answers your money questions

Question

We are 75 and 70. We own our home, do not have any shares and do not have any debt. My husband has a self-managed super fund in pension mode worth just under $1,000,000. Our son and I are trustees of the fund. There is the possibility of an inheritance in the future but we are not counting on that.

My husband is considering closing the super fund as we are paying fees and accountants fees to keep it open when our income is negligible because of the low interest rates, which will probably remain that way for a number of years. He would keep the money in a term deposit and perhaps purchase shares.

We have no other income. What are the pros and cons of this?

Answer

I certainly agree that there is no point in having a self managed super fund if the only investment of that fund is bank accounts. But, irrespective of which vehicle owns them, I am concerned in view of your relative young ages that you are considering moving almost all your assets to cash.

Given that the top superannuation funds have been averaging at least 8 per cent per annum long-term I believe a better option would be to think about rolling a big portion of your SMSF into a good retail superannuation fund. That way, all the work would be done for you, and there would be no administration or investment decisions to worry about. You could always keep say $200,000 in the bank for the next few years living expenses.

Question

My question is about a family home and Centrelink. If you own a suburban home in a capital city is there a minimum period of time you must live in the house for it to be exempt from the assets test? I am thinking of a situation where a person sold their home two years before they reached pensionable age, and then used all the proceeds from that home plus withdrawals from superannuation to buy a much more expensive home than the one they sold.

Answer

The family home is exempt as long as you are living in it, and there is no minimum occupancy time required by Centrelink. However, I think the big decision for you is how much you wish to spend on the new property given you will still need funds for living expenses as well as the age pension.

A couple can have assessable assets of $401,500 and still receive the full pension under the current rules. Take advice and then do your own calculations.

Question

It's conventional wisdom that prospective retirees should reduce their investment risk profile to protect their superannuation from adverse financial events before accessing it. I am 62 with over $1 million accumulating in super. I have received advice from an actuarial friend who recommends the opposite of this keep it in either balanced or even aggressive mode.

I respect my friend but I was very surprised at this advice. I gather that provided it is a larger balance and not withdrawn as a lump sum but rather converted into an account-based pension the underlying investment still earns a return and would have the time to recover from financial hiccups. Does my colleague have a point?

Answer

I think the advice from your friend is a bit simplistic. What many people are doing now is dividing their superannuation assets into buckets whereby they allocate certain portions of their funds to be used in specific periods of their life. For example, given you are 62, its quite possible you will live to 90 or more. Therefore, you can afford to take a long-term view with a major part of your assets.

But if you intend to retire in say four years, and start to draw on your superannuation then, you need to set aside specific funds for that purpose as well. Just keep in mind that an account-based pension is not a one size fits all universal product its just an income stream being drawn from your super fund and the performance of that fund will depend on the assets in which it invests.

So, hypothetically, if you were retiring in four years, you would need enough money in the conservative area to ensure you had at least three years expenditure in the conservative bucket to carry you through when you retired. This does have a cost - you always pay for insurance.

For example, in the 10 years to February 2021 the good growth superannuation funds returned 9.1 per cent, the balanced funds 8.3 per cent and capital stable 5.6 per cent.

Obviously, you would need to adjust your asset allocation regularly in line with changing economic and market conditions. What you want to avoid is being forced to dump good assets at a time when the market is having one of its regular downturns.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au