Getting into property is harder than ever, property prices are significantly higher than average wages pushing home buyers to sign onto long-term leases of 25-30 years when previous generations could own a home in 10-12 years.
As well as the steep asking price, the best way into property is with a comfortable deposit, a gap that’s difficult to bridge, especially now with increasing living costs and inflation forcing businesses to add even more to asking prices to cover their costs.
Even as the housing market takes a turn, prices are not expected to drop back to or below those seen before the pandemic.
In an effort to make owning a home more manageable for average Australians, particularly those renting and looking to purchase their first home, the Australian government is opening up more and more incentives to make it possible.
One of these boosters is through Superannuation.
Tapping into Superannuation for Property Ownership
While initially designed as a retirement fund savings, superannuation has now morphed into a savings account for property purchases, as well as a steady investment method. Getting access to superannuation funds before retirement is normally costly, however, as we teeter on the brink of a potential property crisis, there are some new exceptions to the rules.
There are two avenues available for gaining access to superannuation for property purchases:
- First Home Super Saver (FHSSS)
- Self-Managed Super Fund (SMSF)
So what are they, who can access them and how do these super-incentives work?
First Home Super Saver
You can use super to help bridge the gap of attaining your first home deposit, provided you have been putting in voluntary super in addition to the amount legally required by Australian law.
Using your super as a saving account to buy your first home has several advantages over a bank savings account;
- Salary sacrifice agreements mean your voluntary payments are not counted towards your income tax
- Is only taxed at 15% when placed in the fund
- Higher interest rates
- Can invest as much as $1,500 per year without penalty
- It’s only accessible for your property deposit, so you won’t be tempted to use your savings for any other purpose
You can take out as much as $50,000 of your voluntarily paid contribution, plus any interest that money has accrued while invested.
Who is eligible for the First Home Super Saver?
To be eligible you must be purchasing your first home, be the primary occupant of the purchased property, and remain so for at least six months within the first year of ownership- so this is not a property you can use for investment, initially at least - for investment properties see the section on SMSF below.
Another great advantage is that applications are completed on an individual basis, even when more than one party is buying the same property. That enables couples or family members buying property (who are all eligible first home buyers) to put aside money into their respective super funds and compound the benefits by withdrawing up to $50,000 each when it comes time to secure their property.
To release the eligible super funds, first home-buyers apply to the ATO for an FHSS determination and a release.
One thing to keep in mind is that the funds are locked to a property deposit. That means if your situation changes and you don’t end up buying a property, the funds will stay in super until your retirement.
Self-Managed Super Fund
While just about every working Australian has a super fund, very few know that their money is often invested. Over time superfunds have proven to be a steady investment choice, with gains on par or even higher than many other investment options. Rather than letting your super provider choose your investment platform, you can select where to put your money for growth with a self-managed super fund (SMSF).
This is strictly an investment purchase and will usually be entered into as a group, although solo investments are possible. In the case of sharing the investment, you would own a half, third, or quarter share in a property, but you wouldn’t have any access to use it as a home.
There are other investment options available outside property as well including shares and stocks, however, with property booming, many first preferences for investment is the property at the moment anyway, especially as it is likely to increase considerably when you cash in at retirement time.
How Can I Use a Self-Managed Super Fund to Buy a property?
There are strict limits on how much of your fund you can invest and who you buy property from. In the case of SMSF, you can only loan 70% of the property value from a lender, even the usual lender’s mortgage insurance won’t be available to close the gap.
While you can invest 100% of your super fund in shares, you won’t be able to use the full amount for an investment property - and you will also need to ensure you have a liquid buffer in the form of cash or shares to help out if your property investment fails.
That said, it is possible to take a large portion of your fund and put it towards a property deposit and take the rest of the property amount out through a regular mortgage, giving you access to a $600,000 apartment with just $200,000 of super.
In most cases, it’s the SMSF trustees who will be receiving the beneficial interest from the asset, with legal ownership held in trust under the standard Limited Recourse Borrowing Arrangement (LRBA).
Where do I go for Superannuation saving advice?
To fully understand your obligations and the restrictions and risks of either super fund access option it’s important to get professional financial advice, especially with the SMSF as it’s a highly regulated process, and your fund setup needs to be precise.
While information, like what we have provided here, is really helpful for defining your choices and giving you more options for property ownership, it doesn't cover all the angles or provides advice on an individual level. To know what choices are right for you and your property goals, it’s important to get professional advice from a registered financial planner.
Once you have your deposit and your property secured, it’s time to have your property contract checked thoroughly to know you are putting your hard-earned money towards a worthwhile investment that will see you secure and settled for years to come.
