Why not use superannuation to increase home ownership?

Home ownership is the first financial priority for Australians according to a recent  small (1594 Australians) online survey conducted by Sweeney Researcher for Westpac Bank.  In the surveyed group 57% rated owning a home, or paying off a loan sooner is their top financial priority.

The object of this study was to draw attention to the advantages afforded by the Bank’s Offset Accounts as a means of significantly reducing the interest burden, and thus repaying the loan sooner.

Early loan repayment is arguably the most effective way to improve one’s financial position. Term deposits may have a yield of 4-5% but are subject to taxation. Early home loan repayments at the present standard variable home loan rate of about 6%, (less if discounted) saves this full amount, and the benefit is compounded from that time on. Furthermore with home ownership, the asset is exempt from capital gains tax.

http://www.westpac.com.au/docs/pdf/aw/Westpac_Home_Ownership_Report_Executive_Summary.pdf

Government initiatives to promote home ownership

First Home Housing and Construction Grants are available through the State Governments. In South Australia this benefit has been extended to the end of 2013, and provides $8500 for new homes valued at less than $450,000.

Such generous grants do not always provide the full benefit intended because some providers take advantage of the greater affordability to increase their charges.

Australia lags Canada in both retirement saving and in home ownership

A recent Mercer Consulting Report quoted by “The Australian” showed that the net retirement benefits of an average Canadian Worker is almost 20% or $72,905 higher than the Australian counterpart’s average of $369,858.

The Canadian Advantage – the “Registered Retirement Savings Plan

This is a considerable difference in end benefit. Probably the most important reason for this outcome is the provision of a retirement savings plan (RRSP) in addition to the comprehensive national Canada Pension Plan (CPP). It does not exclude other superannuation arrangements made by the employee or his/her employer.

It is a plan that encourages individuals to save extra funds for their own retirement. The incentive to save lies in providing a tax-deferred concession. Tax is paid on withdrawals or exit from the scheme.

What makes these plans so valuable is the ability to borrow from the savings to fund the purchase of a home, or to meet the costs of further education/training.

These are two of the most expensive items to be met. Both are costs to be faced in the first half of our lives, when savings are least. At this time savings solely for retirement will earn a poorer return than paying off a home loan, or earning additional qualifications. The compounding of such savings is offset by compounding of the erosion in buying power due to inflation.

Conclusions

Governments are faced with an ageing population, and an escalating demand for the aged pension. This must be financed by taxes from a proportionally smaller work-force.

Rather than just restricting and diminishing benefits, a prudent government should do all it can to encourage individuals to save as much as possible in safe guaranteed accounts.

The Canadian system of Registered Retirement Savings Plans offers significant advantages in flexibility especially for those under 40, whose savings will be significantly eroded by the time they reach retirement, should they live long enough.

It deserves careful study.

 

 

 

About Kenneth Robson

I studied at Adelaide Boys' High School, and the University of Adelaide, Medical School. graduating in 1961. My field of specialisation was Plastic and Reconstructive Surgery. Prior to establishing my practice in Adelaide, I spent 5 years working in India, and Papua-New Guinea, in the field of reconstructive surgery for leprosy. In retirement I joined the Australian Technical Analyst Association and passed the two examinations for a Diploma inTechnical Analysis, and the designation Certified Financial Technician (CFTe) by the International Federation of Technical Analysts.
This entry was posted in Community Issues and tagged , , . Bookmark the permalink.