Money News is a segment which takes you behind the new stories about money to analyse what’s behind the headline. This week, we look at a Queensland couple who are building a home with no savings and no mortgage. Can it be done? Let’s find out.
Can you really buy a home with no savings or mortgage? Young people are the target for headlines like this because many of us are priced out of the housing market. There is a growing perception that many young people will be either unable to be a house or will be saving for years and eating baked beans in order to scrap together a deposit payment. And it’s becoming a more widely held view.
63% of Australians believe that owning a home is now out of reach for young people.
This statistic was reported in the ABC’s Australia Talks National Survey. It’s true that house prices have outstripped the average wage increase so it is much harder for young people today to buy their forever home compared to their parents or grandparents. Public commentators sniping at millennials to indulge in less avocado on toast push the idea that we simply need to save more until we can afford a house. And given the limited wage increases compared to house prices, we’ll be saving for a while.
In this context, when we see a story about young people buying a home without savings, it’s the perfect clickbait because we feel like we’ve found the secret to home ownership for young people.
This story appeared on the property website Domain on 4 August 2020. Let’s go through the story and dissect the facts behind it.
“How this Queensland couple plan to build a brand new house with no savings and no mortgage.”
Given the median sale price in Queensland was $400K at the time of writing, I’m intrigued. A 20% deposit on that median house price would be savings of $80K so I’m wondering how this couple have bypassed the need to gather a deposit.
“It’s usually only the wealthy who can afford to buy property without borrowing from the bank but, in the midst of a pandemic, this Brisbane couple plan to build a new house not only without a mortgage, but without having to save a cent for the deposit. Local snake catcher Chris Gorter and his partner Christie Waddups, who recently lost her job with a fashion label in a Paddington retail store, decided they would each access $20,000 from their superannuation, which instantly gave the couple $40,000.”
Firstly, he has a very cool job. Secondly, I really feel for Christie in losing her job in the current environment. Many retail stores closed and are struggling due to the impact of COVID-19 so this a reality many people are experiencing.
How can they access $20,000 each of their retirement fund? Well you have previously been able to access you super based on compassionate grounds, like needing to money to pay for medical treatment. But COVID-19 opened this up to more people, with Aussies now about to access some of their super early if you’re been made financially worse off because of COVID-19. Losing your job would satisfy the Australian Tax Office’s criteria for early super withdrawal.
You could access $10,000 of your super per financial year which meant that these two could apply before and after 30 June for access to their super, giving them $20,000 each. Combined they unlocked $40,000 in total from their super accounts.
“They worked out that if they pooled that $40,000 with the Queensland government’s First Home Owners’ Grant and the federal government’s HomeBuilder grant, they’d have a cool $80,000 between them. “In the current coronavirus climate, my partner and I have been able to access $40,000 of super between us in the past month,” Mr Gorter told Domain. With the first-home buyers’ grant of $15,000 and the home builders’ grant of $25,000 we are able to access $80,000 … without savings.””
This is a very good point. On top of the federal government’s early superannuation payment, they also unlocked state government support payments for people wanting to own their first home. It can be really difficult to buy a house for the first time in Australia so each state and territory government offers some form of payment or fee discount to make it a bit easier to buy your first home.
They’ve also taken advantage of the specific HomeBuilder grant program. The government made this program available to help the Australian home construction market recover after many projects have been on hold during COVID-19. It means that if you’re going to live in your home or buy your first home, you now get $25,000 to build your home or renovate an existing home. It runs until 31 December 2020 so if you’re looking to purchase your first home, you should check it out.
I’m actually really impressed by how they’ve done their homework to find these payments across different federal programs and state support. Definitely disproving the millennial laziness stereotype. If I could ask one thing, it would be for them to start building some savings and create an emergency fund just in case the build costs escalate on this home building project or they run into an unforeseen situation like losing their single income source.
“While $80,000 would normally mean a respectable deposit on a house or apartment, the pair knew they didn’t want a mortgage, especially with Ms Waddups currently out of work, so they looked at what they could build for $80,000 without having to borrow from the bank. They discovered they could buy land on Russell Island, a tiny town set off the coast about 40 kilometres from the CBD, and managed to purchase a block for just $21,000.”
So this is a really interesting point. There is a glut of apartments on the market for inner city areas and young people typically occupy these apartments. However, as someone living in an apartment in a capital city, there is nothing I want more right now than to have a lawn and a garden of my own.
They also decided to buy in an area outside the city. Russell Island is situated just off the coast of Brisbane, the state capital city of Queensland Australia. It is an island so you have to catch a ferry to get to the mainland which takes around 15 minutes. It’s a quiet, easy lifestyle with a marine park and a birdlife sanctuary and from researching forums, there are also a bunch of available land blocks bought by retiring investors who bought blocks in the 1970s but never developed them. If you’ve been to enough nightclubs and want a quieter lifestyle, this makes complete sense.
And finally, they don’t have a mortgage. Fun fact, the word mortgage literally translates as ‘death pledge’. And for many people it can be if you can’t afford it and the house you’re meant to be enjoying becomes a source of financial stress. I would also strongly lean towards saving up a bigger deposit so that you don’t owe as much on your mortgage and will pay back less money in a shorter amount of time. If you can avoid the stress of a mortgage all together, more power to you.
“Mr Gorter and Ms Waddups will use the rest of the money – $59,000 – to build a tiny home, which will include septic, foundations, electrical, plumbing, transportation costs and local planning applications through Redland Council. The one-bedroom home will total around 30 square metres, with the couple also planning to install a shipping container for storage. It will feature decking to add more living space outdoors. All going according to plan, the couple are hoping to have their tiny home built and be moved into the island by the end of the year.”
The tiny house movement is the idea of living in a small space with less stuff. The size of the average house in Australia has increased in the past few decades and this has correlated with our increased spending on non-essential clothes, bags, shoes – stuff.
Tiny houses can provide you with huge savings including spending less money on building materials for a smaller build, discounted utilities costs as you have less lights in the house to spend electricity bills on and potential savings on land tax depending on where you live. You also have to plan how to effectively use the space you have so you’re less likely to spend money on impulse purchases and future stuff you don’t really need.
“The couple said they would have struggled to get a mortgage through a bank to pay for the home, given Ms Waddups’ job loss, and that they felt comfortable about using their superannuation for the build, even though they would have less to call on when retiring. “Superannuation [investment] is tumbling anyway so we’re just trying to come up with options of how to get a roof over your head in a cheap and sustainable way,” Mr Gorter said. “We figured it would be more prudent in the long term to access super for our home.” He said people needed to know this was an option and urged buyers to consider thinking outside of the box in order to get on to the property ladder. “There are a lot of people – particularly young people – that are priced out of the market and it’s really hard for them to save for a deposit,”.”
So yes, on average superannuation or retirement funds will be losing money right now. We are entering a recession, during which investments in the market generally lose value and many retirement funds are in part linked to investments in the market. However, there are pros and cons to withdrawing your superannuation early, which are important to consider before you touch your retirement fund. Tapping into your superannuation is an option, whether it’s to access emergency cash on compassionate grounds or because you’ve been financially hit by COVID-19. You need to consider the pros and cons of taking an action like withdrawing your super early and then use that information to decide whether it’s worth it for you and where you’re at in your life right now.
“Associate director and mortgage broker with Prosolution Private Clients Jodi McKeown said while the couple might have been able to undertake the build using their superannuation, it was not as easy for those looking to borrow money. “I understand people on JobKeeper can access their superannuation in an emergency, but they would need to get another job and serve the probationary period and then approach lenders [to successfully get a mortgage]”. People would also need to meet the requirements of the genuine savings credit policy that the banks and other lenders have. Under that policy, many banks require at least 5 per cent of a deposit comes from longer-term savings, considered to be those with the bank for more than three months. Ms McKeown said those applying for a mortgage would also need to ensure the property they were buying or building met the lending or investment requirements.”
The point this mortgage broker is making is that you are unlikely to get a mortgage without a source of steady income to pay off that mortgage. They also recommend a minimum deposit of 5% which means you’re likely going to have to pay Lender’s Mortgage Insurance. But this insurance is not for you – the Lenders Mortgage Insurance (LMI) protects the bank from financial loss if you as the borrower can’t meet your mortgage repayments. It will also cost you tens of thousands of dollars. You can avoid LMI if you’re a first home buyer by signing up to the federal Government’s First Home Loan Deposit Scheme whereby the government effectively pays the LMI for you. Even better, you can save a 20% deposit or save $100K for a $500K house as a down payment, which will reduce the mortgage you owe to the bank and save you financial stress.
Ultimately, stories like that of a couple buying a house without savings or a mortgage are the perfect clickbait for young people.
We dream of being able to buy our own home and affording a proper house one day rather than the standard apartment. Young people today are also subject to a narrative that they can buy a house if only they didn’t eat so much smashed avocado for brunch. I really like reading stories like the young couple who did it themselves because it shakes up this narrative. They put in the effort and tried something different to achieve their dream of home ownership and that brings hope to other young people that home ownership is within our grasp.
Read more: 8 steps to financial independence