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Can you use superannuation to buy a house?

By Mo Zeitouneh

While initially designed as simply a way to save money for retirement, many people wonder if they can use superannuation to help them buy property.

Here’s everything there is to know about using super to buy a house.

Can you use super to buy a house

Yes, there are ways you can use super to buy a house – however it’s not as easy as you may think.

You can’t simply withdraw the super you’ve saved over the years to buy your first home (unless you’re a retiree and have reached preservation age – the age at which you are allowed to start withdrawing super).

There are three ways to buy property using your superannuation fund:

  1. Through the federal government’s First Home Super Saver Scheme (FHSS) to help save a deposit for your first home faster through additional super contributions
  2. By setting up a self-managed super fund (SMSF) and using that money to buy an investment property
  3. Once you’re eligible to use your superannuation (currently 60 and retired or 65 even if you’re still working), you can use it for whatever you want.

An increasing number of people are taking control of their own superannuation and where it should be invested. Picture: Getty

Use the First Home Super Saver (FHSS) scheme to buy a house

The FHSS scheme lets

lets first-home buyers withdraw additional superannuation contributions to purchase a property.

Some superannuation contributions are taxed at a concessional rate of 15% instead of your standard marginal tax rate, so this can make it faster for first-home buyers to save for a deposit.

How does the FHSS scheme work?

The FHSS scheme lets eligible would-be home owners make additional contributions to their superannuation to be withdrawn later when they want to buy a house.

You 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, up to a total of $50,000.

When you’re ready to buy, you ask the ATO to withdraw the additional contributions you made as well as deemed earnings on that money (based on the shortfall interest charge).

The first $27,500 that goes into the account each year is taxed at just 15% and not at your usual marginal tax rate. Any compulsory contributions an employer makes, as well as voluntary contributions, are counted towards this threshold.

Because some tax is still taken out, you will probably save less than $15,000 per year, but you will probably still save more than if it was going into your bank account and taxed at your marginal rate but this all depends on your individual circumstances.

First-home buyers can start saving under the FHSS scheme by entering into a salary sacrifice agreement with their employer (before tax contributions) or by making voluntary personal super contributions (after tax contributions).

When you are ready to release your FHSS amounts, they need to apply to the ATO for a FHSS determination and a release.

Who is eligible to use the First Home Super Saver Scheme

You might be able to use the FHSS Scheme if you are:

  • 18 years or older when requesting access to funds. Eligible contributions can be made before you turn 18.
  • A first home buyer and have never have owned a property in Australia – including investment property, vacant land, commercial property, a lease of land in Australia or a company title interest in land in Australia (you may still be eligible even if you have previously owned property if the government has determined you have suffered from financial hardship)
  • Live in the property for at least six months within 12 months of buying it, or after it is practical to move in.
  • Never have applied for money to be released from the scheme previously.

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.

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, and deemed earnings on that money
  • Making concessional contributions through salary sacrifice can lower taxable income.
  • The benefits are per purchaser, rather than per property like some other schemes and incentives – so couples get double the benefit.

Are there any disadvantages to the FHSS scheme?

There is a downside though to the FHSS scheme. Contributing extra cash to the scheme means that cash is “tied up” to a deposit and not available for other uses. If you don’t end up using the money to buy a house, you won’t be able to access until you retire.

You can also only use the money to purchase your first home and you need to live in it

The amount you can save is also tied to your income. This means that if you’re on a lower income and a lower tax rate then the benefit might be minimal. If you’re on a higher income then remember that there is a yearly limit of $27,500 for adding money to super and this includes your employer’s contributions.

Use a self-managed super fund (SMSF) to buy an investment property

Australians can use their superannuation to buy an investment property, but it can only be an investment property.

If you have a self-managed super fund (SMSF), a fund that can have between one and four members, then you (and the other members) can make decisions about how your superannuation is invested – including buying investment properties,

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.

You can only use your superannuation to buy investment properties. Picture: Getty

Use SMSF as a deposit for a house

It’s possible to use the money in an SMSF as a deposit to secure a loan for an investment property, explains Michael Yardney, the chief executive of Metropole Property Strategists.

“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.

Using your super to buy a home can be done if you take the right steps. Picture:

Banks will most likely only lend up to 70% of the house value, and won’t allow LMI 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.

Practically, this means that any property purchased using an SMSF cannot be bought from or leased to a related party.

For further information on the rules and regulations surrounding SMSFs and property see the ATO’s website.

If you’re a first-home buyer you can cash in on some government incentives to help save the deposit. Picture:

Buying a house with your super once you have reached preservation age

You can access your superannuation for any reason once you have reached preservation age (for most people that’s 60) and retired, or after you turn 65 even if you’re still working.

This means you can take it out all or some of your super to use to buy a house or pay off a mortgage or whatever you want.

It’s still not quite as simple as it seems though; make sure you talk to a registered financial planner as there can be tax implications and withdrawing large amounts of your super will also impact future earning potential. If you’re wanting to use the money for a deposit, then you need to remember that’s it’s more difficult to get a loan once you’ve retired.

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.


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