This how-to guide will show you everything you need to know when it comes to buying a house with superannuation.
First, I’ll show you if you are eligible to use superannuation to buy a house.
Then, I’ll help you figure out strategies to make buying a house with super work for you. Later on, there are even details for investors too.
Sound good? Let’s dive right in…
Can I use Super to Buy A House?
In this section, I’ll help you figure out if you’re eligible to buy a house with superannuation. So if you’re not sure if buying a house with super will work for you, this chapter will get you on the right track. Then, later on, I’ll show you a bunch of advanced strategies and techniques.
Am I Eligible to Make Voluntary Contributions Towards my Super Deposit?
Let’s get one thing straight: you can’t technically use your superannuation to buy a house. But, first home buyers are eligible to make voluntary contributions towards their super and use it as a deposit. This strategy is called the First Home Super Saver (FHSS) scheme.
This scheme allows first home buyers to save up to $30,000 of voluntary contributions overall. Spread across each financial year, you can save a maximum of $15,000.
Another great feature is that first home buyers in couples could save up to $60,000 combined. You must plan to live in the property within the first year of owning it and be a member of an Australian super fund. The scheme can be used in conjunction with the First Home Owners Grant too. #winning
The best part?
The main benefit of this scheme is that when you take the money out, it will be taxed at a discounted fixed rate of 15%.
Wait, so is this for me?
This scheme is only available for first home buyers.
You may be eligible for the FHSSS scheme too, subject to meeting the ATO’s release criteria.
Using super for a house deposit: Does the FHSSS earn you more money?
The Government’s FHSSS has estimated that up to 30% or more can be saved using the scheme.
For example, someone earning $65,000 per annum, and sacrificing $15,000 per year could lead to $25,280 towards a deposit.
In comparison to keeping that amount in a savings account, you’ll have an extra $5,834 (or 30% more) than saving in a standard deposit account.
What about the difference between low and high-income earners?
It depends on the timeframe. The difference becomes greater in savings over two years for high-income earners. In the table below, you can see the difference between incomes.
However, smaller long term contributions for low-income earners prove to generate better savings and a higher additional savings amount.
How to request funds?
First, you’ll need to figure out how much money you have contributed to the fund. When you review your super balance, you can check the total to keep track of the maximum amount you can release ($30k). Once you’re ready to release the funds (the best part!), you will need to apply for a FHSSS determination and release form.
If you haven’t made a request yet, and find yourself in a position of signing a contract, make sure that you:
- Have an FHSS determination before you sign
- Have a valid release request within 14 days of the contract being signed
Wait, what’s an FHSSS Determination?
The First Home Super Saver Scheme – determination form is what you will need to lodge first. You will need to apply for and receive, an FHSSS determination before applying for the funds to be released. After you have an FHSSS determination signed, with the signed contract, you cannot request another one. From there, you need to request your finds to be released.
Pros and Cons of the Scheme
Not every Government scheme is perfect. So let’s take a look at the pros and cons of the First Home Super Saver Scheme to give you a clear idea of whether it is for you or not.
The pros of the First Home Super Saver Scheme
- Save money on tax repayments
- You can use the scheme as a couple, combining your funds
- The funds earn SIC rate of 4.96% p.a. which is higher than most savings accounts
- The amount you can withdraw doesn’t vary with falling markets
- You will be given a 12-month buffer to purchase a home with the funds after you withdraw the money.
The downsides of the scheme
- It is subject to change in line with government changes.
- You will have less take-home pay as the money will be salary-sacrificed.
- It can be a slow process to release the funds, up to 25 business days. This means you could be at risk of losing your potential dream home.
- If you sign a contract BEFORE releasing the funds, you will need to pay a 20% FHSSS tax.
- $30,000 is the maximum a single person can contribute to the find, which might not be enough for a deposit (if you don’t want to pay LMI).
- Returns are limited to the Shortfall Interest Charge (SIC) rate of 4.96% p.a. Which is low in comparison to other super funds.
If I can’t use super as my deposit, what other options have I got?
So maybe you’re not eligible for the FHSSS. Fortunately, there are other options for you to get into the property market. And in this chapter, I’m going to lay out a few different ways that you can buy a house sooner rather than later.
Get a Guarantor
The eligibility requirements to become a guarantor are:
- The guarantor has equity in their current property
- They have a stable income
- Good credit
- Australian citizen
- Between 18 to 65, as lenders do not usually accept retirees
When a guarantor takes on a property with the buyer, they are legally required to pay back the loan if the buyer cannot fulfil repayments. They will need to pay any extra fees or charges too. The good news is the guarantor can take on just some or part of the loan. So if this happens, only a portion of the loan will fall back onto them.
If you are in a stable financial position and are ready to get into the property market, having a guarantor can be a great way to fast-track this process.
Save a more significant deposit
Sometimes, all you need to do is continue saving and wait a little longer. The more you save, the easier it will be financially to pay your mortgage and still afford to live.
Figure out the costs associated with buying a home here, and what budget you’ll need to adjust to.
A great way to maximise your savings is by starting with your expenses.
Do an audit of unnecessary spending.
Are you spending money on UberEats or AfterPay each week?
Time to cut those expenses. Now replace that money by putting it into savings.
These small changes will help you speed up your savings process.
Buy with a partner or family member
A lot of thought needs to go into this one if you’re planning to buy a property with a partner or family member.
First, make sure you’re on the same page and have clear guidelines for each buyer.
Figure out a contract with ownership over the property, and have an exit strategy should either one of you want to sell their half of the property.
You may feel like these steps are unnecessary, but should financial situations or circumstances between you change; it’s essential to have all of your ducks in a row.
Buying with your partner or family member can be a great way to combine your savings and make the process much more affordable.
Chapter 3: Self-Managed Super Funds – how do they work?
Now that you’ve thought about other options when it comes to saving, aside from the FHSSS, it’s time to take a look at Self-Managed Super Funds (SMSF).
In this chapter, I’ll show you how to work with an SMSF and make the most of it.
This section is specifically for property investors.
Self-managed Super Fund property rules
So what is a self-managed super fund?
The concept is through a self-managed super fund, you can use the money to buy an investment property.
Yet the catch is, you aren’t allowed to live in it.
You can buy the property through your SMSF, and the fund can have one to four members.
The members will need to make a decision together about how the super is invested.
What are the SMSF rules?
To buy a property through an SMSF, you need to comply with a few rules.
The property must:
- Fulfil the sole purpose test of providing retirement benefits to fund members
- Not be acquired from relatives
- Not be lived in by any members of the fund or related parties of the fund
- Not be rented by a fund member or associated parties of the fund
The loophole? It is possible to use the purchase as your business premises. And you will pay rent to your SMSF at the market rate.
What it will cost to use super for a house deposit?
Buying an investment property through a self-managed super fund will still have the same fees and even some extra charges that could eat into your super balance.
Check with your mortgage broker and lender before going ahead.
As an idea, some of the fees incurred include:
- Legal fees
- Stamp duty
- Advice and upfront fees
- Ongoing property management fees
- Bank fees
This is where things can get a little tricky.
Borrowing or “gearing” your super needs to be implemented in a controlled and strict way.
The conditions to follow are around a ‘limited recourse borrowing arrangement’.
This type of arrangement can only be used when buying a single asset – i.e. residential or commercial property.
If you are ready to commit to a geared investment, consider whether the investment is in line with your broader investment strategy.
What are the risks of a geared SMSF property?
- Cash flow – putting money from your SMSF into your loan is required, and you will need to have enough cash flow to maintain this
- Extra costs – SMSF property loans are often more costly and have additional fees in comparison to standard loans.
- Potential tax loss – The losses on the property cannot be offset against your income outside of the fund.
- No turning back – If you haven’t set up your loan correctly, like documentation and the contract, then turning the arrangement around can be very difficult. Sometimes not even possible. In this case, you would potentially have to sell the property, which would most likely result in loss.
- No changes to the property – While the SMSF property loan is being paid off, you will not be able to make any changes to the property.
Bonus: Using a personal loan as a deposit
As tempting as it can be to get a personal loan and use it as a deposit – don’t do it.
- Banks nowadays are more diligent about their research, and if they find out you got your deposit from another loan, they will most certainly deny your home loan application.
- Personal loans can significantly reduce your borrowing power. By ‘significant’, we mean hundreds of thousands of dollars.
These days there are a lot of self-proclaimed social media financial advisors encouraging you to get personal loans and use them as a deposit. As tempting as it may sound, run far, far away from personal loans. Instead, talk to a home loan expert who will help you get the home loan that is right for you.
So, no matter how persuasive the video telling you to get a personal loan is, just don’t do it.
Is Using Super to Buy a House Right For You?
If you are looking at using super to buy your house in Brisbane or across Australia, our team at Hunter Galloway can help.
Our service does not cost you anything as we are paid by the lender when your home loan settles.
To chat about your deposit, lending and investment lending options book in a time to sit down with us, or feel free to call on 1300 088 065.
The information on this page is general in nature and should not be considered as advice. Before you act on this information you must seek independent legal and financial advice.