Super withdrawals and lending
Back in March the Australian Federal Government introduced a range of measures to assist the economy during COVID-19, one of which was the ability for financially affected people to withdraw $10,000 from their superannuation in the 2019/2020 financial year and then a further $10,000 in the current 2020/2021 financial year.
The purpose of the measure was to assist these people to be able to afford their living expenses in the event that they were stood down, laid off, or had their hours reduced, as a result of COVID.
When it was first introduced, there was no particular verification required. You logged in to the myGov website and went through the application process, which at that stage was essentially a “trust” process. There were questions in the application about reduction of income during the lockdown period, as this essentially was the criteria for eligibility - hardship; however many people seemed to have other ideas in mind for the cash.
Over this period, we have seen that many people have used this opportunity to drawdown on their super and bolster their savings to purchase a home. In theory it’s a good workaround, but lenders do have a process to check on this.
When applying for a loan, applicants need to provide three savings statements to prove they have saved at least 5% of the purchase price of the property. This is called ‘genuine savings’. Applicants also need to prove that they have enough money to pay the difference between the purchase price plus costs (such as stamp duty and solicitor’s fees) and the loan amount - this is called ‘Funds to Complete’.
If the super drawdowns have landed in your savings account within three months of the application - and have obvious amounts, like $10,000, or have obvious descriptions like ’super’ or the name of a super fund - the lender will question the source of the funds. If they find out it is super, they are currently rejecting these applications. This relates back to the eligibility criteria for early super access - that you weren’t supposed to be drawing down super unless you had an income problem caused by COVID.
There are other ramifications to drawing your super early, such as having enough super for your retirement. Missing out on compound interest by drawing the money out now in comparison to leaving it in your super fund for the long term and thereby receiving interest on your interest, should be weighed against the potential growth of owning a home.
For many people, the allure of owning a home now and getting out of the rent cycle is strong and therefore they would prefer to drawdown on their super. I understand that reasoning, but I’d strongly recommend doing some thorough research on the pros and cons and perhaps getting some professional advice first.
