The cost of using your KiwiSaver for your first home deposit
Could it be an $800,000 opportunity cost?
You’re saving to buy a house in New Zealand’s overheated property market. With the rate at which NZ house prices are increasing, even pulling together a 10% deposit might feel like you’re fighting an uphill battle. So, you’re planning to use your KiwiSaver balance to help make up your deposit. But should you?
We understand many Kiwi’s will need to choose between draining their KiwiSaver account and fulfilling their homeownership dreams. But is it actually a good idea? What is the opportunity cost? And is there a better way?
The rules around using your KiwiSaver for your first home deposit
First things first, if you do want or need to use your KiwiSaver as part of your first home deposit, what are the rules?
If you meet the below criteria, then it’s likely that you’re eligible to use your KiwiSaver balance to go towards your first home deposit:
- Be a member of either a KiwiSaver scheme or complying superannuation fund for three years
- You must intend to live in your property or on the land that you're buying (that means it can't go towards an investment property that you won't be living in), and it must be in New Zealand
- You must be buying your first home or land, or qualify for a second chance home buyer withdrawal. If you have previously owned a home but your financial position is now like that of a first home buyer, then you might be eligible. You can find out whether you qualify for a second chance home buyer withdrawal over on the kāinga ora website.
If you’re eligible to use your KiwiSaver for your first home, then it’s also useful to know that you have to leave at least $1,000 in your KiwiSaver balance when you withdraw it. Plus, it’s worth checking whether you qualify for a first home grant.
For more info, check out our blog 8 tips for first home buyers using their KiwiSaver.
The opportunity cost of using your KiwiSaver for your first home
It’s easy to get so swept up in the Kiwi dream of owning a home that you might overlook some of the drawbacks – and when you’re planning to use your KiwiSaver balance to help you into that first home, the drawbacks come as an opportunity cost.
If you were to figure out another way of scraping together that deposit and leaving your money invested in your KiwiSaver account, what could that money be doing (or generating) for you instead?
The opportunity cost is losing out on the compound returns your balance could make if you otherwise left it invested.
For example: if you currently have $30,000 in your KiwiSaver account and the market performs well, you could earn a return of up to 10% (the average KiwiSaver growth fund has returned 9.9% per annum over the past 10 years) versus the mortgage cost of 3-6% per annum. And, if you keep the money invested you get the benefit of compounding returns, so your return grows each and every year.
In case you need it, here’s a quick run-down on how compounding returns work: if you earn a 10% return in a year, that $30,000 has a return of $3,000. The next year, if markets perform well again with another 10% return, that $33,000 returns $3,300. If you purchased your first home at the age of 30 and had a $30,000 KiwiSaver balance, by the time you reach 65, that KiwiSaver balance could reach the whopping sum of $843,000 – almost 30x your original $30,000 balance.
In this scenario, you’re opting to keep the $30,000 in your KiwiSaver, and instead are borrowing an extra $30,000 on your mortgage to make up for the shortfall. Even when you consider the cost of borrowing that extra $30,000 (approx. $52,500 in interest over 35 years as part of your mortgage, assuming a 5% cost of debt), it’s still a massive $790,000 difference over the 35-year life of your KiwiSaver.
Not following those numbers? In another blog, we’ve talked about whether people should concentrate on paying down debt or making investments, and the same theory applies to first home buyers. The cost of your mortgage will almost always be lower than the return from investing over the long run (and in this case, adding $30,000 to your mortgage would cost you another $52k, while keeping the $30,000 in your KiwiSaver means a return of $843K). That's a total difference of $789,437.
In this example, the potential opportunity cost of withdrawing your KiwiSaver for your first home is $789K.
While the above example is a hypothetical situation, it still illustrates the power of compounding returns, and how withdrawing your KiwiSaver balance now could mean a whole lot less for you to retire on later. You also need to remember markets may not continue to perform as well as they have for the past 10 years.
With that said, we totally understand that choosing between buying a first home or investing for your retirement is not a simple decision, and a whole lot of other factors will need to be considered (like the benefits of not paying rent and instead paying off your mortgage, the security of owning your own home, etc).
So if you ask us, ‘should I really use my KiwiSaver for my first home deposit?’
Our answer is: If you don’t have to, then don’t. Your future self will thank you for it. But, if it’s your dream to own your own home and using your KiwiSaver balance is the only way you’re going to be able to afford it, go right ahead.
What if in the future there was another option?
Imagine a future where the current regulations, laws, and out-of-date rules didn’t exist when it came to first home buyers using their KiwiSaver. Instead, first home buyers could use their KiwiSaver balance as security and borrow against their KiwiSaver to help get them into their first home (just like people can currently borrow against other assets or property).
That way first home buyers wouldn’t have to forfeit their compounding returns that will help to fund their retirement, and instead, their KiwiSaver balance (and only the amount they’re using as security) would only be liable if they were no longer able to afford their mortgage repayments.
Banks would still have their security, the government would benefit from the general population being better able to support themselves during, and first home buyers could get on the property ladder without having to wave goodbye to their compounding KiwiSaver returns and a better retirement.
What do you think?