While initially designed as simply a way to save money for retirement, superannuation has morphed into a tool for buying property.
While it might not be as simple as withdrawing super and buying a home, by using a self-managed super fund (SMSF) or tapping into the federal government’s First Home Super Saver (FHSS) scheme, it’s possible to buy a house, thanks to the tax benefits on offer.
Australians who set up a SMSF can decide where their super is invested and that can include investment properties, but not a place to live. And through the FHSS scheme, first-time buyers can save for a deposit, via voluntary contributions, inside their superannuation account.
Here’s everything there is to know about using super to buy a house.
Using a self-managed super fund (SMSF) to buy a house
Under the rules of a SMSF, Australians can use their superannuation to buy an investment property, but not one they plan to live in.
The property can be purchased through the SMSF; a fund that can have between one and four members. The members make their own collective decisions about how their superannuation is invested.
This could still mean investing in shares, but with property experiencing stunning growth in the last decade or so, many people instead include houses as part of their investment strategy and retirement plans.
Setting up a SMSF is a highly regulated process, and it’s smart to get professional financial advice to understand the responsibilities and set up the fund correctly.
Buying a house to live in? Here’s how much deposit you will need to save.
Use SMSF as a deposit
Industry guru Michael Yardney, the chief executive of Metropole Property Strategists, explained how people can use super in a SMSF as a deposit to secure a loan to then buy an investment property.
“If you had a $300,000 balance in your super, you could own $300,000 worth of a managed fund or BHP shares, or you could use $200,000 of that money as a deposit and borrow another $400,000 to buy a $600,000 apartment. So you get the benefit of leverage and gearing,” he said.
Restrictions on borrowing through a SMSF are quite strict though. Firstly, it’s not possible to use the full super balance to buy an investment property.
“You’ve got to leave some behind as a buffer. The banks are more careful so they’re only going to lend you a lower loan-to-value ratio,” Mr Yardney said.
Banks will only lend up to 70% of the house value, and won’t allow lenders’ mortgage insurance to increase that amount. Remember there are many hidden costs involved in buying a home too.
SMSFs are also required to keep a “liquidity buffer” – made up of things like cash and shares – that is worth 10% of the proposed investment’s value in the self-managed fund.
Borrowing money to buy property is often done through a Limited Recourse Borrowing Arrangement (LRBA), which involves the SMSF trustees receiving the beneficial interest in the purchased asset, while the legal ownership is held in trust.
SMSF property and arm’s length rules
Any investment – such as buying property – through a SMSF must be done on an “arm’s length” basis.
Generally speaking, that means SMSFs can’t buy assets from, or lend money to, fund members or other related parties, although there are some exceptions to this rule. There are other rules too.
The definition of “related parties” often trips up SMSF trustees because a related party is not defined merely as a relative or another member of a SMSF. It also includes:
- the relatives of each member
- the business partners of each member
- any spouse or child of those business partners
- any company that the member or their associates control or influence
- any trust that the member or their associates control.
It’s also important to note that employers who contribute to a member’s superannuation are considered related parties too.
For further information on the rules and regulations surrounding SMSFs and property see the ATO’s website.
Using the First Home Super Saver (FHSS) scheme to buy a house
The FHSS scheme lets would-be first-home buyers save for a deposit inside their superannuation account.
Rather than use existing super to buy a property – as can be done through a SMSF – the FHSS scheme helps Aussies save for a deposit faster, because of the concessional tax treatment of superannuation.
Those on the scheme can make voluntary concessional (before-tax) and non-concessional (after-tax) contributions into their super fund to save for a first home of up to $15,000 per financial year.
They can then apply to release those contributions and any associated earnings for a deposit. The dollar value of contributions that can be released is currently capped at $30,000, but from 1 July 2022, that amount will be increased to $50,000.
How does the FHSS scheme work?
The FHSS scheme is designed to help first-home buyers save a deposit faster by making additional contributions into their super – rather than into a saving account – so they can take advantage of the favourable tax treatment super gets.
The first $25,000 that goes into the account each year is taxed at just 15% and not at the usual marginal rate. Any compulsory contributions an employer makes, as well as voluntary contributions, are counted towards this threshold.
A first-home buyer can contribute up to $15,000 a year under the FHSS scheme to a maximum of $50,000, from July 1 next year. The maximum used to be $30,000 but was upped in the most recent federal budget.
The first-home buyer can then withdraw funds contributed under the scheme to help pay for their first home. It helps buyers save for a deposit faster, because of the concessional tax treatment.
To be eligible, first-home buyers must either live in the premises they’re buying or intend to do so “as soon as practicable” and also intend to live in the property for at least six months within the first year of ownership, after it is practical to move in.
Eligibility is assessed on an individual basis, meaning couples, siblings or friends can each access their own eligible FHSS contributions to buy the same property.
First-home buyers can start saving under the FHSS scheme by entering into a salary sacrifice agreement with their employer or by making voluntary personal super contributions.
When first-home buyers are ready to release their FHSS amounts, they need to apply to the ATO for a FHSS determination and a release.
For more information read our full guide to the First Home Super Saver scheme.
What are the benefits of the FHSS scheme?
There are a number of benefits to the FHSS scheme.
- It can boost a first-home buyer’s savings by letting them save the difference between their marginal tax rate and the 15% rate charged on super contributions
- Making concessional contributions through salary sacrifice can lower taxable income.
- The scheme isn’t affected by falling markets.
- A couple gets double the benefit.
There is a downside though. Contributing extra cash to the scheme means that cash is “tied up” to a deposit and not available for other uses.
Get professional advice
As with any major financial decision, people should seek advice from a registered financial planner before opening a SMSF, to understand how their fund will operate and how they’re able to access and use their superannuation.
The information in this article is for general interest and is not intended as advice. For advice and planning, consult an experienced financial planner.