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Super and first home buyer schemes restart tomorrow but are they a good idea?

Two major government schemes restart tomorrow as the new financial year begins but comparison site RateCity.com.au is warning Australians to think before they jump in.

From July 1, eligible Australians financially affected by COVID-19 will be able to access up to $10,000 extra from their superannuation.

Round two of the First Home Loan Deposit Scheme also starts tomorrow, when a further 10,000 places become available to buyers with as little as 5 per cent deposit.

However, research from RateCity.com.au shows people need to be aware of the hidden costs of both schemes.

COVID-19 early access to superannuation
Already 2.4 million Australians have applied to access their super, averaging $7,492 per person, according to APRA.

From tomorrow, eligible people will be able to pull out up to $10,000 again. But does it make financial sense?

A 30-year-old who takes out $10,000 now will have an estimated $21,516 less in retirement, according to ASIC. If they take out another $10,000 after July 1, they would have a total of $43,032 less in retirement.

Source: ASIC. Assumes income of $50,000 and retirement at 67.

RateCity.com.au research director Sally Tindall said superannuation is there to support Australians in retirement.

“Before you raid your nest egg again, think carefully about the long-term implications,” she sated.

“If you’re thinking about accessing this scheme, ask yourself, is there another way? Talking to a financial counsellor might help you think of alternatives to get you through.

“If you have no alternative but to tap into your super, try to put the money back when you’re on your feet again to minimise the long-term fallout,” she said.

Tips if you do access your superannuation again from July 1:

  1. Call a financial advisor or counsellor for independent advice.
  2. Make sure you meet the criteria. There are fines of up to $12,600 for misleading claims.
  3. Come up with a plan to put the money back into your super as soon as you can.
  4. Take as little as possible and use the money wisely. This is your nest egg. Don’t see it as an opportunity to buy a new TV.

First Home Loan Deposit Scheme
From tomorrow, another 10,000 places will become available in the federal government’s First Home Loan Deposit Scheme.

Under this initiative, 27 lenders, including big four banks CBA and NAB, are allowing first home buyers to take out a mortgage with as little as 5 per cent deposit, without needing to pay lenders’ mortgage insurance.

But buying a home with a 5 per cent deposit, as opposed to a 20 per cent deposit, can be more expensive.

RateCity.com.au research shows a person buying a $500,000 property with a 5 per cent deposit, instead of a 20 per cent deposit, would need $75,000 less initially. But with a larger loan, their mortgage repayment would be $395 extra a month and they would pay $67,067 in extra interest to the bank over 30 years.

This is based on taking out CBA’s basic home loan at a rate of 3.13 per cent for an owner-occupier paying principal and interest.

“In these uncertain financial times, where unemployment is on the rise and property prices are on the decline, borrowing with just a 5 per cent deposit can be risky,” Ms Tindall said.

“Falling property prices come with both opportunities and risks. People might find they don’t need to spend as much and their deposit, as a percentage of the property price, has actually gone up.

“However, there’s a risk that property prices will fall even further and people who buy with a wafer-thin deposit could find themselves in negative equity if they’re not careful,” she said.

Notes: Based on CBA’s basic home loan for owner occupiers paying principal and interest with a rate of 3.13% for a loan-to-value ratio (LVR) of more than 80% and a rate of 2.79% for an LVR of 80% or less. Calculations are based over 30 years and do not include fees or stamp duty. Assumes LMI is $0.

Potential pros:

  • Avoid lenders mortgage insurance.
  • Get into your home sooner.
  • Stop paying rent.
  • Prices could rise after you purchase your property.

Potential cons:

  • Higher monthly repayments.
  • Pay extra interest over the life of the loan.
  • Some lenders charge higher interest rates for people with small deposits.
  • Property prices could drop, potentially leaving you in negative equity.

Eligibility criteria:

  • People must earn less than $125,000 a year for singles, or $200,000 a year for couples. Wages are based on your earnings from the last financial year.
  • Never owned a property.
  • Owner-occupier requirements apply.
  • You must be an Australian citizen and over 18. Permanent residents can’t apply.
Source: https://www.nhfic.gov.au. The capital city price caps apply to regional centres with a population over 250K. For other islands and territories not listed see govt website.
SUPERANNUATION NOTES: The estimates provided use the assumptions and default values from the Superannuation Calculator based on an income of $50,000.

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