The mistake you're making when saving up for a house deposit

Millennials are caught between a rock and a hard place: whichever way they turn they seem to be stymied. As a demographic they stare down the barrel of stagnant wages, insecure work and high property prices. Expecting them to put more into super is a big ask.

So it might come as a relief to many that the legislated rise in the super guarantee (SG) from 9.5% to 12% of wages may be put on hold. The SG is scheduled to rise incrementally by 0.5% each year, starting this July, until it reaches 12% in 2025.

The possible change of plans follows the release of the Retirement Income Review, which casts doubt on whether any increase is actually necessary. It noted that at 9.5% most workers will retire with a disposable income equal to the widely accepted benchmark of 65% to 75% of their pre-retirement income.

The report notes some groups, such as renters, especially single people, will be worse off in retirement because they face higher housing costs - which brings us back to millennials and their struggle to get onto the property ladder.

The reality is house prices have outstripped pay rises.

House prices on the rise

The Grattan Institute summarises it simply.

"While rising house prices may be in part offset by lower interest rates, younger Australians are typically spending about 25% more of their disposable income servicing their mortgage compared to equivalent purchasers 30 years ago."

In response to the review, many economists have warned that workers overwhelmingly pay for increases in compulsory super contributions through lower wages.

When the pandemic struck last year, the federal allowed Australians to dip into their super and withdraw up to $20,000, subject to certain conditions. Some millennials saw it as an opportunity to cobble together a home loan deposit.

Dominique Bergel-Grant, a financial planner and director of Leapfrog Life, says while home ownership is a bigger priority than boosting super in the early years, what happened was crazy. "I'm against the idea that the 9.5% employer contribution is accessed by first home buyers for a deposit. I don't support it because it will leave them with not enough money in retirement."

Instead, she gets her millennial clients to build a deposit the old-fashioned way by spending less and saving more and explains how the ability to use debt carefully can build their wealth.

"If you and your partner save $100,000 to $150,000 you are probably going to be spending $500,000 to $1 million on your first property purchase depending on where you live. If the $500,000 asset increases by 4% a year, your equity is growing by $20,000. If it's a $1 million asset, that's $40,000 a year."

Although the property market doesn't always go up, she says long-term averages going back 30 years show Australian prices increase by about 4% a year.

With interest rates at historic lows and little prospect of rising in the short term, Bergel-Grant says it gives property the edge and underlines why "it's a bigger priority than having another $5000 or $10,000 in super".

Pay more than the minimum

She encourages her clients to make more than the minimum mortgage repayments to build a buffer. This also builds up their equity and wealth.

"You then have enough equity in that property to look at making another investment.

"What I typically say to clients is we won't make extra super contributions until we've got that first property purchase under our belt.

"So long as they have regular employer contributions going in at 9.5% for their entire working life, that will provide a very solid nest egg that will give them enough money in retirement."

But if there's a break along the way, that gap will need to be plugged, she says.

"If you're female and planning on having kids you'll need to have a strategy to compensate your super at some stage. That's where the 9.5% falls down for women because they may work part-time for five years or be out of the workforce and, having done that, never work at the same pay rate again."

Don't ignore your super

She says being disengaged from super is not a solution.

"Don't throw your super statements out. Look at them, call your fund or financial planner. Ask what the money is invested in, ask why it has made or lost money. Look into the insurance. You can't just ignore it."

As clients get older they might downsize from the big family home. "It can be a good retirement strategy once the kids have left home. The client might have originally paid $1 million - a huge amount of money when they bought it - and it has gone up to $2 million or $3 million."

They can now use $1 million to $1.5 million to top up their super.

"When you sell your family home, there is no capital gains tax payable, which is a massive advantage."

She also points out the home is exempt from the age pension asset test.

"There needs to be a degree of personal responsibility. It's keeping an eye on the future and understanding what roles your home and super play."

She says there is no guarantee the age pension will remain as generous as it is now.

And if you are renting in retirement, the outlook is grim.

"Realistically, the age pension is designed for a full pensioner living in government housing where it is heavily subsidised. That's the stark reality."

The First Home Super Saver Scheme

The federal government's first home super saver scheme allows first timers to use their super to save for a deposit. Its potential tax benefits and investment earnings may help you enter the property market sooner.

If you haven't previously owned a home you can make voluntary, before-tax super contributions of up to $15,000 a year. However, that amount, plus your employer's SG contributions, must not exceed the concessional contribution cap of $25,000 a year.

The maximum a person can save under the scheme is $30,000. The individual limits allow a couple to save up to $60,000 to buy their first home.

"It suits some people and doesn't suit others," says Leapfrog Life's Dominique Bergel-Grant. "If all your money is invested in the sharemarket and it falls significantly you may find you may have been better off having the money outside of super in cash."

She recommends you first work out your time frame and the eligibility rules and establish the pros and cons.

For more details go to the tax office website.

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