This is one of those questions we frequently get asked as people explore all their options for either getting on the property ladder or buying an investment property. The simple answer is yes - you can use superannuation to buy a house although there are strict caveats about how this can be done. In fact there are only two ways of unlocking your super savings to invest in real estate. So how can you use super to buy a house in Australia? Let’s take a look at the options.
As we explored in our last blog, saving enough for a deposit and avoiding additional costs has become a challenge for many first home buyers. And with the buoyancy of the Australian property market in the last few years, investment properties have been an attractive choice for those with a Self Managed Super Fund.
Can You Use Your Super To Buy A House?
So can you use your superannuation to buy a house? The simple answer is yes - however we need to make one thing clear: there are a few strict caveats about who can do this and how it can be accessed. After all, super is supposed to be the tool we use to save money for retirement. So it’s not quite as simple as withdrawing your super balance and setting off in search of a property (unless you’re over 65). Let’s start with who can take advantage of this option and how you can go about doing it.
There are basically two ways of using super to buy a house:
If you’re a First Time Buyer you can take advantage of the Federal Government’s First Home Super Saver (FHSS) Scheme.
If you have a Self Managed Super Fund (SMSF) you can determine your own investment strategy and this can include investment properties (though not a property you intend to live in).
Using Super To Buy A House Through The FHSS Scheme
The FHSS assists eligible first home buyers to save for a deposit within their superannuation account by making voluntary contributions. The scheme enables people to potentially save their house deposit quicker due to the concessional tax treatment of superannuation.
You can make the following types of contributions towards the FHSS scheme:
voluntary concessional contributions – including salary sacrifice amounts or contributions for which a tax deduction has been claimed or you intend to claim, these are usually taxed at 15% in your fund.
voluntary non-concessional contributions that you have made – including personal after-tax contributions where a tax deduction has not been claimed.
You can apply to have a maximum of $15,000 of your voluntary contributions from any one financial year included in your eligible contributions to be released under the FHSS scheme, up to a total of $50,000 contributions across all years. You will also receive an amount of investment earnings that relate to those contributions.
Key Benefits of the FHSS Scheme
So there are a couple of key benefits of the FHSS scheme to highlight. The favourable tax treatment of super means that if you have an income of less than $250,000 each year you will only pay 15% tax on your contributions instead of your usual marginal tax rate. This could help you reach your savings goal quicker.
In addition, if you’re buying a house with a partner, eligibility is assessed on an individual basis. This means that two people could each contribute to their super, and access their own FHSS contributions to purchase the same property. So you could potentially combine your funds and claim up to $100,000 ($50k each) - double the benefit.
Also your super fund may earn a higher rate of interest than a regular savings account or term deposit with a bank.
FHSS Scheme Eligibility
To be eligible for the FHSS, you must meet the following criteria:
You must be 18 years or older.
You must be a first home buyer and not have owned a property (including an investment or commercial property) in Australia before.
You must have made voluntary contributions to your superannuation fund, such as salary sacrifice or personal contributions.
You must be intending to live at the property as an owner occupier as soon as is practicable and also intend to live in the property for at least six months within the first year of ownership.
You must not have already tried to use your super for a first home deposit.
It’s also important to highlight that you can only withdraw from your super ONCE so you have to be ready to take the leap to buy a home when you make the decision to withdraw.
This is a basic summary of the FHSS scheme and how you might be able to use your super to buy a house. However, it’s important to see if it’s right for your personal circumstances and weigh up the limitations of the scheme. It pays to get support from an industry professional to help you do this.
Buying A House Via a Self Managed Super Fund (SMSF)
A significant number of Australians now manage their own superannuation funds. If you’re confident about investing and prefer to have more control of your long-term financial outcomes, a self managed superannuation fund (SMSF) is a popular alternative to industry and retail super funds. It allows those with the time and skill required to invest their retirement savings within the frameworks and regulations provided by the Australian government. This includes using your super to buy a house.
There are quite strict limitations about when a SMSF can borrow money. However, one of the key limitations is that the fund can only be used to buy an investment property. This means that you or other trustees of the fund cannot live in it and it must be used for the sole purpose of providing retirement benefits to you and the other trust members (of which there can be up to 4).
In addition, the property cannot be acquired from relatives; lived in or rented by related parties of the SMSF trustees.
Using Super To Buy An Investment Property
There are quite strict guidelines about borrowing through a SMSF. However, it is possible to use super in a SMSF as a deposit to secure a loan to then buy an investment property.
For example, if you have a super balance of $400,000, you could use $300k as a deposit and borrow an additional $400,000 to buy a $700,000 property. This is known as ‘gearing’ and is one of the few occasions, under Australian super laws, when a fund can apply for a loan. N.B. you cannot use the entire balance of the super account.
This method is known as a Limited Recourse Borrowing Arrangement or LRBA. An LRBA is a particular type of loan that protects the SMSF, its trustees and its assets from lenders if a default occurs on the loan.
There are a number of complex and strict rules on this process so it’s highly recommended that you work with an experienced SMSF finance professional to ensure that you comply with all regulations and do not face serious investigations or possible legal consequences.
While there are obvious benefits to being able to use super to buy a property, there are also risks and limitations associated with it, such as:
High costs: Setting up and maintaining an SMSF can be expensive.
Legal requirements: There are strict legal requirements that must be followed when using an SMSF to purchase a property.
Liquidity buffer: SMSFs are required to maintain a buffer of cash and shares that’s worth 10% of the value of the investment property.
Limited liquidity: Property is a less liquid investment compared to other investment options.
Is Using Super To Buy A House Right For You?
Using super to buy a house can be a smart financial decision for some people. However, it's important to understand the details surrounding the two options we’ve highlighted here. Before making any decisions, seek professional advice to ensure you understand the legal requirements, costs and risks associated with each option.
The information in this article is general in nature and doesn’t take into account your personal circumstances or financial situation. If you’re exploring ways to get on the property ladder, an experienced home loan expert and SMSF Finance expert from CJG Finance can help you navigate the process.
To find out more, contact us or call Colin at CJG Finance on: 0402 413 917 or email him: cgreen@cjgfinance.com.au