A person should be allowed to borrow the deposit for buying their home from their pension fund

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Brendan Burgess

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This is the outline of the submission I will be making to the consultation on auto enrollment.

A person in their 20s or 30s faces a double savings burden. Do they contribute to a pension or do they save up for the deposit on a house?

For some people it's a question of timing. The requirement to contribute to a pension delays them from getting on the housing ladder. For many on low to average incomes, they will not be able to afford both and a mandatory pension system will prevent them from getting on the housing ladder.

Of course, the absolute priority should be to get the deposit for the house. And when you have bought the house and have reduced the mortgage to a comfortable level, then you will be able to contribute to a pension fund. So there should be no quasi-mandatory contributions to pension schemes for people who do not yet own a house.

But this double burden has been made artificial by our pension laws and tax laws. And these need to be changed to integrate pensions and home ownership.

And it’s a very simple change I would propose. Allow people to borrow the deposit for their family home from their pension fund.

And this would be in the form of a second mortgage on the home.

For the borrower it is a normal mortgage secured on their home and which must be repaid.

For the pension fund it is a normal investment on which they will be getting a return.

Say I want to buy a house for €100,000 – I would borrow €80,000 from a bank and borrow the €20,000 from my pension fund.

The pension fund would charge interest at something like ECB +2%, so from the pension fund point of view, it is an investment just like any other investment.

If the person wants to sell the house later on, they have to use the proceeds first to repay the mortgage to the bank and then the pension fund mortgage.

This has huge advantages

· First and foremost, it would be a huge motivator to young people to contribute to their pension fund. They would see that there would be a benefit from contributing to their pension fund in the near future. Compare this to the present situation where they have to wait until they are 65 to see a benefit.

· Secondly, it would be much cheaper for the borrower. They would be paying their pension fund ECB +2% rather than the outrageous mortgage rates being charged by Irish lenders at the moment.

· Thirdly, it would actually makes the banks more secure. The maximum Loan to Value could be reduced to 80%. This would enhance the stability of the banking system.

The Kiwi Saver system allows the person to take their entire pension fund early to buy a home!

In New Zealand, contributing to the Kiwi Saver pension scheme is quasi mandatory. But after three years of contributions, the pension fund holder can withdraw the entire amount tax-free to use towards buying a house.

This goes much further than I am suggesting. Because it depletes their pension fund.
 
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noproblem

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Could this be seen as a benefit in kind by revenue seeing as the borrower will be not only getting a pension benefit but also a benefit from the (hopeful) increase in house value?
 

Brendan Burgess

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I don't see why?

They would be taking out a mortgage from their own pension fund and paying ECB +2% interest on it.

Brendan
 

galwaypat

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More buyers with larger deposits looking to buy houses. The problem is the shortage of affordable housing for first time buyers i don't see the solution here.
 

Brendan Burgess

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Hi Pat

There are a few problems in the housing markets. But this is not aimed at a quick fix to the current housing problems.

This is aimed at boosting people's savings and, in particular, their pension savings by making it easier for them to buy houses.

It does not solve the housing problem. But in time it will lead to enabling more people to buy homes sooner.

Brendan
 

noproblem

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I don't see why?

They would be taking out a mortgage from their own pension fund and paying ECB +2% interest on it.

Brendan
Ok, I see that, but they would also be eventually the recipient of the 2% interest plus the added benefit of what that money was used for, ie, to buy the asset. But I do understand where you're coming from, will the revenue?.
Also, our goverment are not making things easy for property owners who rent and a lot of renters have very little respect for the property they've been given as a home. That and other problems need sorting.
 

TheBigShort

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This sounds like a very interesting idea Brendan.
To put it in an example as I understand it, it would work something like this;

A person takes up full-time employment in early twenties. They are automatically incentivised to pay into a pension fund by virtue of being able, at some future point, to borrow from the fund to use as a deposit in a house.
They receive a mortgage from bank (80%) and the pension fund lends (20%).
This amounts to a 100% loan which doesn't sound like a good idea, but as 20% of repayments are directed to the borrowers pension fund it acts as a foundation for financial stability in retirement years and within the banking mortgage lending sector.

If that is the jist of it I have just two questions.

1) Are deposit borrowings made against the entire fund or only against what the borrower has contributed?

2) Would pension contributions need to continue in addition to the loan repayments for the deposit?
 

Brendan Burgess

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This amounts to a 100% loan which doesn't sound like a good idea, but as 20% of repayments are directed to the borrowers pension fund
It sounds like a 100% mortgage, but it's not really. The borrower owes 20% to him own pension fund.

1) Are deposit borrowings made against the entire fund or only against what the borrower has contributed?
The individual can borrow their entire fund up to a certain limit - I suggest €100k.

2) Would pension contributions need to continue in addition to the loan repayments for the deposit?
Yes, this is about the auto-enrollment system which is quasi mandatory. It should continue to be quasi mandatory.

In New Zealand, they allow the borrower to take a break after they take out a mortgage. But I don't see the necessity of that here.

Say someone has €50k in their pension fund and buys a house for €250k. They continue paying into their pension fund and the employer continues contributing as well. They can borrow another €50k with which to reduce the external mortgage so it's in their interest to max their contributions right up to the [€100k] limit.

At that stage, they would have a €150k external mortgage so the repayments would be lower which would allow them to continue contributing to their pension fund.

Brendan
 

TheBigShort

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Brendan, I think your idea has real merit in principle.

However, appreciating that this is just a discussion forum and, acknowledging my own tendency to drill into topics to the (apparent) annoyance of some others, I would be interested to explore this idea in more detail on the basis that the topic doesn't wander (thats my commitment).

If that is good to go? then the first thing that jumps out is "say someone has €50k in their pension fund"....
Even if a 10% mandatory pension contribution was imposed, how long would it take for a couple on average earnings of say €75,000 combined, to build up fund?
 

TheBigShort

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Just to add to the above. Determining what % of income is contributed will determine how quickly they have a pension fund for a house deposit.
Say 8% of income, on average incomes it would take a couple on €75,000 eight years.
Probably longer if they start out mostly likely on lower incomes to begin with.

And while that may be doable, continuing contributions while paying down the mortgage could be a cause for financial strain.

Nevertheless, I think such a system has a real basis to providing for a sound and stable financial structure providing for retirement and simultaneously restraining the mortgage market from growing too big, too quick.
 

Blackrock1

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im pretty sure there is a similar scheme in canada, or something like it,

will it not be inflationary on house prices, as you are effectively able to save gross wages to use as a deposit?

it is the genesis of a good idea though.
 

Brendan Burgess

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Hi Shortie

The current straw man proposal from the government is that people will obliged to pay 6% of their salary into a pension fund.

My argument is that if people put money into their pension fund, it will mean that they have less to save towards a deposit, so it will delay some people from getting on the housing ladder. For others, it will prevent them from getting on the housing ladder at all as they won't be able to do both.

Even if a 10% mandatory pension contribution was imposed, how long would it take for a couple on average earnings of say €75,000 combined, to build up fund?
So my answer is a lot less time than it would take if they had to build it up from after-tax income.

Brendan
 

Brendan Burgess

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will it not be inflationary on house prices, as you are effectively able to save gross wages to use as a deposit?
Yes. I would reiterate that this is not being proposed as "the" solution to the current housing problems. If this were introduced tomorrow, it would just cause house price inflation. It's a medium to long term proposal which would have to be phased in to avoid causing housing inflation.

Brendan
 

Brendan Burgess

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im pretty sure there is a similar scheme in canada, or something like it,
That is very interesting. A quick Google search did not turn up anything. If you have any information on this, I would appreciate it.

The Germans have a Wohn Reister: "The aim of the promotion is to create incentives for additional private old-age provision by integrating owner-occupied apartments into tax-subsidized old-age provision."

And the New Zealanders allow the saver to withdraw the entire Kiwi Saver account to use towards the purchase of their home.

It would be great to see other examples.

Brendan
 

Sarenco

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will it not be inflationary on house prices, as you are effectively able to save gross wages to use as a deposit?
It would inevitably have an inflationary effect on house prices and that's the fundamental flaw with the proposal.

New Zealand has some of the most unaffordable housing on the planet - median house prices are something like 10 times median incomes.
 

TheBigShort

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Going on the 6% I think such a system would be an excellent idea.
My only concern would be the requirement to continuously pay into the pension fund on top of repaying the mortgage, particularly when it first commences.
Having said that, it would fuel wage pressure demands and as someone who believes there is considerable scope for wages to increase then I cant really see any reason why such a system is not adopted.
 

Blackrock1

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That is very interesting. A quick Google search did not turn up anything. If you have any information on this, I would appreciate it.

The Germans have a Wohn Reister: "The aim of the promotion is to create incentives for additional private old-age provision by integrating owner-occupied apartments into tax-subsidized old-age provision."

And the New Zealanders allow the saver to withdraw the entire Kiwi Saver account to use towards the purchase of their home.

It would be great to see other examples.

Brendan
Hi Brendan, im pretty sure my brother and his wife did this, looks like its capped at $50k for a couple

https://www.christinehauschild.com/using-rrsps-buy-home/
 

torblednam

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How would this work for public sector workers or other members of defined benefit schemes...?
 

Brendan Burgess

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It works only for members of Defined Contribution schemes and for AVCs in DB schemes.


It could be varied so that a DB scheme provides mortgages to its members but that would be quite complicated.

Brendan
 

Brendan Burgess

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It would inevitably have an inflationary effect on house prices and that's the fundamental flaw with the proposal.
Hi Sarenco

Yes indeed. The guy who developed the idea for home loans back in the 19th century had to fight that argument for some years. People thought it was a really stupid idea to lend money to people to buy houses as surely it would inevitably have an inflationary effect on house prices.

Brendan
 
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