Update: From 1 July 2017, first home buyers will be able to save for a deposit by salary sacrificing or making after-tax contributions into their super saver account. Despite this, a guarantor loan can allow you to get into the property market sooner – click here to learn more.
In the 2017 Federal Budget, the Government introduced wide-ranging policies to level the playing field and help first home buyers (FHBs) get into the property market.
With the First Home Super Saver Scheme, FHBs can make contributions to their superannuation account to later use as their deposit.
Essentially, you’re using super to buy a house but the problem is that these contributions are capped and don’t go far enough as a true no deposit solution.
Can I use super to buy a house?
The short answer is no because you can’t drawdown from your current super balance as it stands now.
So how does it work?
From 1 July 2017, first home buyers will be able to make voluntary concessional (before tax) and non-concessional (after-tax) super contributions in order to save for a deposit.
You can start drawing down on these contributions from 1 July 2018 at your marginal rate (including the Medicare levy) minus a 30% tax offset.
The drawbacks of the super saver account
Contributions are capped
The so-called First Home Super Saver Scheme follows on from the First Home Savers Account introduced under the Rudd Government, which was then later abolished in 2015.
This new scheme sounds good on paper but the fact is that it doesn’t allow you to save a big enough deposit.
As per the regulations, you can only contribute a maximum of $15,000 a year and a total of $30,000 all up.
Even if you were purchasing a property with a co-borrower (your spouse), you’d only be able to save as much as $60,000.
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 another reason why the scheme doesn’t go far enough.
The rate of return is low
The amount of earnings 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 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 will help you fund the cost of stamp duty, if you’re lucky.
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.
Case study of how the super saver account will 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 is 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, you need 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!
You can buy an investment property using your SMSF!
If you have a significant amount of money in super account, say $200,000 or more, then you can buy an investment property in your self-managed super fund (SMSF).
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.
Apply for a home loan
Using super to buy a house has not passed the Parliament.
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Still have questions? Feel free to comment below and we’ll get back to you as soon as possible.