Should I Use My Super To Buy My First House?
Getting into the housing market as a first-time home buyer in 2018 can feel like an impossible dream. Australian property prices have risen by around 620 per cent over the past 30 years and incomes have not kept up. We have politicians telling us to simply “get a good job that pays good money” and everyone else telling us we could buy a house if only we’d stop eating smashed avocado.
So when the government introduced the First Home Super Saver (FHSS) Scheme it finally felt like there was a glimmer of hope that we might not be renting (and feeling guilty about avocado on toast) for the foreseeable future.
What is the First Home Super Saver Scheme?
Simply put, the scheme allows first homebuyers to use their super account to save money towards a home deposit. The idea is to help first home buyers save faster due to tax savings, and typically the earnings on savings in a super fund will be better than what you could earn in a bank account.
So, how does it work and what things should you consider?
The first step is to consider if you are eligible. You may be eligible for the FHSS Scheme if you:
- have never owned properly in Australia
- are over 18 years old
- have not used the scheme before
- intend to live at the purchased premises for a minimum of six months in the first 12 months after purchasing it.
The maximum amount that you can withdraw from the scheme is $30,000 plus the earnings on those funds and this must come from at least two years’ worth of contributions and each year, you can only contribute $15,000 to the scheme. These contribution limits apply to the individual so if you are in a couple, you can both use the scheme if you are eligible.
You can make two types of voluntary contributions: pre-tax (by salary sacrificing or claiming a tax deduction on voluntary contributions you’ve made out of your after-tax income) or non-concessional (after-tax). The main benefit of the scheme exists for pre-tax contributions, as these are taxed at 15 per cent rather than your income tax rate.
Pre-tax contributions are subject to an annual contribution cap of $25,000 p.a. This cap includes the super your employer pays you and further taxes apply once the contribution tax is exceeded. Here is more information on how contributions caps work. So, if you earn $120,000 per year and your employer pays the 9.5 per cent Super Guarantee contribution (i.e. $11,400), that means you can only salary sacrifice $13,600 before you are taxed extra, making the scheme less effective for you.
From 1 July 2018, you can withdraw the net voluntary contributions you’ve made on or after this date, plus earnings based on the deemed interest rate (set by the ATO). In order to access the funds, you’ll need to lodge a request for an FHSS determination and then request a release with the ATO. Once the funds have been released you’ll have 12 months to get your first mortgage signed, sealed and delivered. Tax is payable on the way out, too. Release of your contributions will be taxed at your marginal tax rate less a 30 per cent tax offset.
Sounds good so far? What are the drawbacks of the First Home Super Saver Scheme?
Before deciding to contribute to the First Home Super Saver Scheme, you should consider some of these points:
- If you change your mind or become ineligible for the scheme once you’ve already starting saving, that money is then locked away in your super fund until you reach retirement age.
- By encouraging all first home buyers to take up the scheme, the increased housing demand may actually increase house prices, making it more difficult to enter the market.
- The key benefits of the scheme revolve around the ability to save on tax, so if you’re not paying much tax, the scheme may not be effective for you.
- Conversely, with tax payable when you withdraw your savings, for some higher earning first-home buyers, the benefit may not be enough to overcome the drawbacks.
- In an environment of rising house prices, the scheme has been criticised for not allowing enough savings towards a home purchase, with the maximum contribution of $30,000 not making a big dint on the median Sydney or Melbourne property price.
- Super funds will need greater liquid asset allocations to ensure they can handle unpredictable withdrawals, as the scheme requires them to operate more like a bank, so super returns may suffer.
- The FHSS scheme sets a possibly dangerous precedent for using super to meet non-retirement needs.
- The current government have shown a tendency to tinker with super rules, so there is always the risk of legislative changes.
While something needs to be done to help us avocado-loving-renters get into the property market, the FHSS Scheme may not be the answer. Perhaps the Government could undertake other measures to improve housing affordability, such as:
- new dwelling constructions
- extending zoning rules to allow for more construction
- restricting foreign investor/student purchases to new property only
- modifying negative-gearing and capital-gains discount concessions.
The information provided in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances and consider seeking professional advice.
This article was first published in May 2018.