In the 2017 Federal Budget, the government introduced wide-ranging policies to help first home buyers (FHBs) get into the property market.
One of them is First Home Super Saver Scheme (FHSSS). With this, FHBs can use money in their superannuation account to purchase their home.
Can I Use Super To Buy A House?
Yes. The FHSSS allows you to make contributions to your superannuation fund and then withdraw them, along with the associated earnings, to use towards a deposit on your first home. Voluntary concessional (before tax) and non-concessional (after-tax) super contributions you have made to your superannuation since 1 July 2017 can count towards your deposit to buy a property. Since 1 July 2018, you have been permitted to withdraw these funds at your marginal rate (including the Medicare levy) minus a 30% tax offset. You have to be eligible for the scheme, and there is a limit to how much you can contribute to the deposit.
To be eligible for the FHSSS:
- You have to be 18 or older
- You must have never owned a property before.
- You must not have applied for the release of money under this scheme before.
You can contribute:
- Up to $15,000 in one financial year and,
- $50,000 maximum across all years
Using your super to buy a house can have long-term implications on your retirement savings, so it is important to consider the benefits and drawbacks before making any decision.
The Drawbacks Of The FHSSS
Contributions Are Capped
The First Home Super Saver Scheme follows on from the First Home Savers Account introduced under the Rudd Government. The scheme can help a first-home buyer purchase a home, but in many cases, it doesn’t allow you to get a big enough deposit from super alone. You can contribute a maximum of $15,000 a year and a total of $50,000 all up.
Even if you were purchasing a property with a co-borrower (your spouse), you’d only be able to withdraw a maximum $100,000. In addition, your contributions count towards concessional and non-concessional contribution caps, and you would still face tax on your withdrawal (albeit with a 30% offset). There’s also another reason why the scheme doesn’t go far enough.
There’s also another reason why the scheme doesn’t go far enough.
The Rate Of Return Is Low
The amount of earnings on your contributions that can be released will be calculated using a “deemed” rate of return. This rate is based on the 90-day Bank Bill rate plus three percentage points (as per the Shortfall Interest Charge). With median house prices upwards of $1 million in Sydney and Melbourne metro, you frequently need more than $100,000 as a deposit to get into a property. Then there are the other costs associated with the purchase.
With the modest deemed rate of return, this scheme may be limited to helping you fund the cost of stamp duty.
On top of that, the Australian Prudential Regulation Authority (APRA) has been pushing banks to be more conservative with their lending policies.Most banks will no longer add Lenders Mortgage Insurance (LMI) on top of a 95% LVR (Loan to Value Ratio). For a $1,000,000 property with a 95% loan, the LMI premium alone is $45,000.
Ultimately, the tax benefits of the super saver account predominantly benefit high income earners who are already in a better position to save a deposit than low income earners.
The Benefits Of The Super Saver Account
Tax Benefits
Contributions made to super saver accounts are generally taxed at a lower rate than other forms of savings, Additionally, earnings on super accounts are generally taxed at a lower rate, which can result in significant tax savings over time.
Boosts Your Savings For A Deposit
Using your savings for a deposit can help boost your deposit, especially if you have been struggling to have enough money for a down payment. This can get you into the property sooner.
There Are More Discussions On The Benefits Of Super
Apart from using your own superannuation to buy your first home, Australia’s multi-trillion dollar super pot may help in other ways. The Australian Housing and Urban Research Institute (AHURI) has pushed for a government department that would borrow money from Australian super funds and institutional investors and lend this money to fund affordable housing projects. AHURI said this federal department would essentially be a “bond aggregator”.
This could help tackle the issue of undersupply in the Australian real estate market and hopefully cool down house prices. First-time buyers trying to crack the market while renting could instead move into cheaper government-subsidised apartments, making it easier to save a deposit faster.
Case Study Of How The FHSSS Would Work
Craig earns $80,000 a year and wants to buy his first property. Using salary sacrifice, he contributes $10,000 of pre-tax income into his superannuation account. This increases his balance by $8,500 after the contributions tax has been paid by his fund. After three years of contributions, he’s able to withdraw $27,380 of contributions, including “deemed” earnings on those contributions. His withdrawal is taxed at his marginal rate (including Medicare levy) less a 30 per cent offset. After paying a $1,620 withdrawal tax fee, he has $25,760 that he can use for his deposit. Craig has saved around $6,240 more for a deposit than if he’d saved a deposit in a standard deposit account.
Disclaimer: Superannuation and tax are complex, so we recommend that you speak to your accountant or financial adviser when running through these figures. Marginal tax rates can change.
Do I Need Any Savings Of My Own?
When a bank considers your deposit to buy a home as part of your loan application, they look at your funds to complete and your genuine savings.
Having enough funds to complete means your deposit, super withdrawal and First Home Owners Grant (if applicable) is enough to cover the purchase price, stamp duty, mortgage fees and legal costs.
Ultimately, your initial costs to buy a home total more than 5% of your deposit in genuine savings to buy a home.
Unfortunately, funds from your super fund won’t count as genuine savings since a portion of your salary is normally applied to superannuation each pay.
It’s not a good indiciation that you’re financially responsible.
The good news is that some lenders will make an exception to their genuine savings policy if you’re renting.
Others have no genuine savings requirement at all.
What Alternatives To Using A Super To Buy A House Are There?
Guarantor Home Loan
Using your super as a deposit sounds like a quick fix solution to having to save a large deposit in a high cost living environment. However, the first problem is that you have to wait potentially two years to get any benefit from the FHSSS scheme.
The second problem is that the benefit is minimal – we’re talking a drop in the ocean in saving the amount you need to buy an averagely-priced property.
Worse still, property prices aren’t waiting for FHBs – everyday it’s becoming harder and harder to get your foot on the property ladder.
If you want to get into the property market sooner and avoid the heartache of missing out on a home, have you considered a guarantor loan?
Why A Guarantor Loan May Be A Better Solution
- You don’t require any deposit at all!
- You can avoid the cost of Lenders Mortgage Insurance (LMI) saving you literally thousands of dollars.
- It’s the least risky no deposit solution on the market and you can remove the guarantee from your parents’ home after you owe less than 80% of the property value.
- You can get in the property market now and not two years from now.
Want to know more? Call us on 1300 889 743 or fill in our free online enquiry form to discover if you qualify.
Shared Equity Schemes
This is a type of home ownership arrangement where two or more parties, typically a home buyer and an investor, will each contribute a portion of the purchase price in exchange for a share of equity in the property. Shared equity can help reduce the financial burden of purchasing a property by sharing the cost of the deposit.
The government offers this opportunity to FHBs. Different states have different requirements. Visit our page on shared equity schemes to learn more.
If you do not qualify for them, there are also non-government schemes like Bricklet’s shared home ownership scheme, where property investors will share equity with you.
Low-Deposit Home Loans
If you are short on your home loan deposit but in a stable financial situation, there are lenders that are willing to lend to borrowers with deposits as low as 5%. However, most lenders will have strict lending criteria for borrowers with small deposits, as these types of loans are considered more risky for them.
They will look for:
- A good income
- Reliable, long-term job
- Eligible loan purpose
- Type of property
- Clean credit file
- Low level of debt
- Genuine savings are usually required
For more information, visit our low-deposit loan page.
You Can Buy An Investment Property Using Your SMSF
If you have a significant amount of money in your super account, say $200,000 or more, then you can buy an investment property in your self-managed super fund (SMSF).
Apply For A Home Loan
There are better options available than using a super to buy a home.
- With a guarantor home loan, you can borrow up to 105% of the property value.
- There are lenders that offer up to 95% LVR home loans.
Our mortgage brokers are here to help you find a low-deposit home loan solution that works for you. Call us on
1300 889 743 or fill in our free online assessment form.