First-home buyers withdrawing superannuation to qualify for First Home Loan Deposit Scheme

Prospective first-home buyers are legally exploiting loopholes in two popular federal government schemes to get into the property market sooner.

Savers have been taking cash out of their superannuation using an emergency withdrawal scheme set up for the COVID-19 pandemic-induced recession, then putting the funds towards a deposit.

With up to $10,000 in withdrawals allowed for this financial year and the same amount for the 2019-20 financial year just gone, the money can help buyers qualify for the federal government’s First Home Loan Deposit Scheme.

The scheme helps borrowers to purchase with only a 5 per cent deposit without paying lenders’ mortgage insurance.

Once the funds have been sitting in a bank account for three months, some lenders will count the cash as genuine savings.

Although buyers are playing by the rules, experts caution against this approach.

Sydney-based Mortgage Choice broker Rob Lees said there has been strong demand for the deposit scheme with several applicants using their super to meet the 5 per cent minimum deposit.

“A lot of people have withdrawn their super … the government made that available but you didn’t have to provide any evidence,” he said. “Because they’ve sat on it for the three months, it meets the banks’ criteria of genuine savings.”

In one case, an applicant withdrew their superannuation without seeing a drop in income and worked hard to cobble the remaining deposit needed to reach 5 per cent, according to Mr Lees.

“He didn’t qualify [for early super withdrawal] but everyone was anxious, no-one knew what the future held and his withdrawal helped him,” Mr Lees said. “It just fast-tracked him … he was probably on a diet of bread and water. He worked hard because he had to work for the rest.”

In another case, a couple – who did see a 20 per cent drop in their income – withdrew their super and banked it for three months in order to count as genuine savings, he said.

“There are people who legitimately got cash out from their super, their income went down, their income was cut by 20 per cent, they qualified for that cash and now they have approval under this scheme,” he said.

“The reason he was able to use it – in both cases – the way banks define genuine savings is it’s either held over three months or accumulated over three months. Once that lump sum is held, it’s genuine.”

But he warned that other applicants who had tried to gather a deposit under the scheme using early superannuation withdrawals had their applications declined by banks.

“I’m sure it’s not what the government intended,” Mr Lees said. 

“I would definitely not recommend people doing that.”

The First Home Loan Deposit Scheme has been very popular, with 10,000 spots released on July 1. Half have already been claimed only six weeks into this financial year.

There are 4503 places already on hold as pre-approved buyers search for a home, new figures from the National Housing Finance and Investment Corporation show, although there is no indication as to how many of these buyers accessed superannuation.

A further 1013 certificates have been issued to buyers who have signed sale contracts.

A quarter of applicants were aged between 18 to 24. Another third were aged 25 to 29 and a fifth were 30 to 34.

The majority of applicants were in Sydney, Melbourne and Brisbane with the average loan-to-valuation ratio at 93 per cent.

Brisbane-based Hunter Galloway mortgage broker Jayden Vecchio said banks were not as lenient as when the first 10,000 spots were released at the start of the year prior to the COVID-19 pandemic, and were now requiring bigger loans in some cases or imposing postcode restrictions.

“A few of the banks, they’re still requiring bigger deposits for a unit in a higher density area,” Mr Vecchio said. “Even with the scheme, with one particular bank they have postcode restrictions.

“If you’re buying in a high-density area, you need a 10 per cent deposit for that scheme.”

Suburbs on the list included Brisbane City, Indooroopilly, Chermside and Coorparoo, he said.

Mr Vecchio said some applicants were also using early superannuation withdrawals to cobble together a 5 per cent deposit for the scheme in the “early days” but banks were more wary of it now.

“The banks are also worried if you’re withdrawing super … they have been really tough when that’s happened.”

In some cases, people have made false declarations on whether or not they have been affected by the COVID-19 crisis, he claimed.

“You’re saying you haven’t been affected by COVID but when they see your statements and your withdrawal from super, it’s contradictory.”

Meanwhile, first-home buying hopefuls in Melbourne have another hurdle to clear due to the city’s lockdown on top of racing to reserve a spot on the scheme, according to Pearse Financial director Tom Pearse.

“They have to settle within 120 days [under the scheme] … at the moment if you’re an applicant there’s nothing on the market for the next six weeks then campaigns start which go for three or four weeks … they’ll be buying at day 75 at the earliest possible,” Mr Pearse said.

“That’s if properties are going to auction, which we don’t necessarily know.”

He said if applicants’ spots expired, they could apply for an extension but that was not guaranteed due to the sheer demand for the scheme.

“If their spot lapses at CBA or NAB, they’ve got a waiting list of people who would jump onto the scheme,” he said.

“There is no way they anticipated a property market would be shut down for six weeks. Hopefully, sanity prevails and clients are given another 30 days for their spots.”