Should you use your super to save for a home?

Getting money together to buy your first home can be a big ask. As well as a deposit (ideally 20% of the house price), you also need to consider stamp duty and other expenses like conveyancing fees. And if you have less than the recommended deposit, you’ll also need to pay lenders mortgage insurance (LMI) – either as a one-off fee or added to your overall loan.

To help aspiring homeowners, in July 2017 the government introduced the First Home Super Saver Scheme (FHSSS) – allowing Australians to use their super to save up to $30,000 towards their deposit. In this year’s budget, it was announced that from an expected start date of 1 July 2022 the amount would increase from $30,000 to $50,000.

On first glance this looks like a positive step forward for first home buyers. And it’s true that the scheme has some potential benefits. But there are a few drawbacks too – including the potential impact the FHSSS could have on housing affordability.

Who’s eligible for the scheme?

If you’re 18 or older, have a super account, have never owned property in Australia and plan to live in the property (rather than rent it out), you can access the FHSSS.

But it’s not for you if you’ve previously owned a home, are retired, or if you’re looking to buy an investment property.

How does it work?

The FHSSS allows you to make voluntary contributions into your super of up to $15,000 each financial year – either through salary sacrifice or after-tax contributions (whether or not you claim a tax deduction). The key is the contribution must be made by you and it must be voluntary. Contributions that can’t be used for this purpose include the money your employer contributes (eg, the ‘super guarantee’) or money that comes from the government or your spouse.

The idea is that you withdraw your voluntary contributions, and any earnings made on it, when you’re ready to buy a home. To do this, you can ask for an FHSSS determination from the ATO, which will tell you the maximum amount you can withdraw.

You’re meant to buy your home within 12 months of receiving the money from your super account (although in some cases you can apply for a 12-month extension).

What are the potential tax benefits?

The biggest drawcard of the FHSSS is that the earnings on the money you contribute to your super fund are taxed at a maximum of 15%, which is lower than most people’s marginal tax rate. If you are saving for a home deposit outside super, by comparison, the earnings on your savings will be subject to your marginal tax rate.

Mind your contribution caps

It’s important to remember that the voluntary contributions you make may be ‘concessional’ or ‘non-concessional’. Concessional contributions include the contributions made on your behalf by your employer, salary sacrifice arrangements you have with your employer, or personal deductible contributions. Non-concessional contributions, on the other hand, are personal contributions on which you don’t claim a tax deduction.

So although you are limited to $15,000 in contributions per financial year for the purposes of the FHSSS, you’ll also need to make sure your total contributions are within the concessional and non-concessional contribution limits. Otherwise, extra tax may apply.

How does it work when it’s time to release the funds?

In most cases, getting the funds out of super can take between 15 and 25 days. This means that if you find your dream home and haven’t withdrawn your money yet, you could miss out. What’s more, if governments or regulations change, the scheme could change too.

Considering the current average price of property in major cities (almost $1.4 million in Sydney and $1 million in Melbourne), a total of $50,000 from the FHSSS (or $100,000 for a couple) may not be enough to cover your deposit and help you avoid LMI.

The other issue is that the scheme, coupled with current low-interest rates, may contribute to pushing up demand for existing houses. This can lead to increased house prices – making it even harder for first home buyers to enter the housing market.

What other options do you have?

Whatever you decide to do, you should also consider other schemes to help you save for your deposit. Check your state or territories First Home Owner Grant Scheme (FHOG). You might also want to see if you’re eligible for the Family Home Guarantee, a new government program aimed at helping single parent families with dependants.

Source: Colonial First State

Ashley Collins