SHOULD I USE MY KIWISAVER TO BUY A HOUSE?
We live in a very pro housing society here in New Zealand. Everyone wants to get on the property ladder, even if houses are relatively expensive. We are told that houses double in price every 10 years and you are a fool if you don’t buy. All the while, conveniently forgetting about all the housing expenses we incur such as rates, maintenance, upgrades, insurance, and mortgages.
Many of us rush into buying houses without actually running the numbers first. We assume it is best for us, based on anecdotal chit chat. Just like we assume Kiwisaver money is best used to get us into the property market. First home buyers are now withdrawing $600 million in withdrawals per year to fund first home purchases. Over $18,000 per person using Kiwisaver for the home withdrawal purpose according to the statistics.
To my international readers, Kiwisaver is New Zealand's retirement scheme and we are allowed to withdraw our money before retirement age for the purpose of a first home purchase.
Have you run the numbers as to how withdrawing funds from your Kiwisaver will affect your retirement or are you going off what everyone else is doing and saying? You know what they say about assumptions, right?
Sometimes the best way to get ahead is to do something a bit different. Something that not everyone else is doing.
LET’S RUN SOME NUMBERS ON AN EXAMPLE
Mike is looking at buying his first home in Auckland. It is selling for $680,000. Mike has $81,000 in Kiwisaver and he is going to use all of that (minus the $1000 kickstart) to contribute to the $136,000 deposit.
Mike is 30 years old. His income is $65,000 per year and he contributes 3% of his income towards Kiwisaver. We will assume a real investment return of 5% and increases in income of 2%.
How much will Mike have in Kiwisaver at age 65? $475,953.
What if he never dipped into his Kiwisaver to pay towards the house? $917,235.
An extra $441,300 in his retirement account.
Sure, if he uses the $80K in Kiwisaver to buy a home sooner he should also finish paying the mortgage sooner. But will it be soon enough to make up the $441,300 difference? Highly unlikely.
HERE COME THE HOUSING POLICE
Right on queue. I can hear all the pro housing brigade banging down the door with all their arguments, not believing that the numbers are correct.
Argument one: “You have forgotten about the capital gains from the house”
No, I haven’t. Housing is a lousy investment if we are talking about the house we live in. It is a drain on our cashflow, with constant expenses. The returns from our own house barely beat inflation. Yes, even if our house price does double every 10 years.
It would be very uncommon for the first house to be his last either. Most of us move up the property ladder, buying into the now elevated market, wiping out any gains. In fact, once we consider rates, insurance, maintenance, mortgage payments, and upgrades, many will make losses on housing if they move up the ladder.
Besides, in both cases, Mike will own a home. It is just that in the scenario without using Kiwisaver as a deposit, he may own slightly later. Once you consider the costs of home ownership, any increase in house prices in those few years will more than likely not be significant.
Argument two: “He will need to pay for the house somehow”
This is true. But it doesn’t have to be from Kiwisaver. Mike can save some money separately to Kiwisaver for the purpose of a house deposit. Kiwisaver could only be 3% of our income. It shouldn’t be too much to save 7% extra on the side. 10% savings rate is realistic for most. Because Mike is renting, he can save up until he has enough for a deposit. It may take him a couple of years longer to buy the house, but he won’t need to dip into his Kiwisaver.
Argument three: “By buying a house later, he will finish paying the mortgage later”
Again, this might be true. But what is wrong with that? Compound interest is most powerful in the early stages of our lives. If we leave our saving until later, we can’t take full advantage of this. The more money we can leave in our accounts early in our lives, the greater the effect of compound interest aka free money.
NOT ALWAYS A FINANCIAL DECISION
The decision to own a house is not always a financial decision. Some of us are happy to pay the extra cost just to have a place to raise the family and call our own. If Kiwisaver withdrawals will help you get there quicker and you are aware of the financial consequences, then full credit to you. You know your goals, wants and needs and have made a decision based on what is best for you. No argument there.
That is what personal finance is all about. Making decisions that are best for ourselves and our situation.
I understand that some people can’t afford to buy a home without the Kiwisaver withdrawal. That is OK.
This is more for people that have the option to use Kiwisaver or not. Those on average to higher incomes with more savings. Run your own numbers before dipping into your Kiwisaver fund because most of the time, and I cannot stress this enough in our housing mad country, Kiwisaver returns over long periods will almost always beat any returns from the house that you live in. The numbers speak for themselves. Compound interest over long periods really is a miracle that is often underestimated, so think twice before reducing your Kiwisaver balance.
Being house rich, but cash poor in retirement is not fun. Don't rush into buying a house or rush into using all your Kiwisaver money before running your numbers. Just by waiting an extra 5 years to buy a house, so you don’t have to tap so much into Kiwisaver, you could be saving yourself hundreds of thousands of dollars.
At least consider the options carefully before rushing into the easiest or most commonly believed way of doing things.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here
The comments are now open, let it rip!