First home buyers planning to use their KiwiSaver funds as a deposit should talk to their provider about switching into a cash fund, says the government's money advice arm.
The warning comes after a volatile few days on the markets. The S&P/NZX 50 Index was up 0.6 per cent as of yesterday afternoon after falling 1.8 per cent on Tuesday in the wake of fears about coronavirus that were compounded by a sharp fall in oil prices.
US stock markets also bounced back yesterday after having a sharp downturn which was hard enough to trigger the 15-minute circuit breaker to halt trading.
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Tom Hartmann, editor of the Sorted website at the Commission for Financial Capability, said some KiwiSaver members could be alarmed to see their balances drop as shares in their funds reacted to the economic effects of Covid-19.
"Markets around the world are riding a rollercoaster of ups and downs in reaction to economic fallout as the virus makes its way around the globe."
Hartmann said sharp drops in fund balances would be particularly concerning to those who had already committed to buying a home and were relying on their KiwiSaver funds to settle offers under contract.
"KiwiSaver first home withdrawal applications take up to 10 working days to process. A first home buyer could run into difficulty if the balance of their KiwiSaver account fell to an extent that they could no longer rely on it to meet the payment terms for their new house. They would then need to find the balance of what was owed elsewhere."
Hartmann said switching to a cash fund would lock their investment into a low risk fund largely unaffected by the sharemarket, although members would also trade possible gains in the market for the security of avoiding potential loss which they would need to weigh up.
"The key question KiwiSaver members should ask themselves right now is 'How soon do I need that money?'," Hartmann said.
"If the answer is sooner rather than later, they should talk to their provider about whether they should switch to a cash fund.
"With sharemarkets rising and falling by the day, it would be unfortunate for losses to foil home ownership plans."
However those members who did not need access to their funds within the next three years would be better placed to ride out the volatility.
"The sharemarket will recover from the effects of coronavirus in time. For most of us, KiwiSaver is a long game and we will benefit from being patient."
Yesterday mortgage broker Bruce Patten said he was concerned about some high loan-to-value ratio borrowers now about to settle contracts.
"This is a good issue to bring to the forefront for people to think about. If there is a widespread market correction, you would expect that means less in KiwiSaver for some.
"There's a real possibility there could be people who can't settle because the bank won't give them any more. Their KiwiSaver has dropped, they can't borrow from family or friends and some settlements might not go ahead," he predicted.
In New Zealand eligible investors are able to use KiwiSaver funds to put toward the purchase of their first home. They need to leave a minimum balance of $1000 in their KiwiSaver account.
It takes around 10 working days to process a KiwiSaver first home withdrawal application and the money is usually paid to a solicitor who then forwards it on to the vendor on settlement day.