How can I use my super to buy a house? Guide for first-time home buyers

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If you’re a first-time home buyer, you may be wondering if you can use your superannuation to help you buy a house. While withdrawing your super early for a home purchase is generally not allowed, government schemes like the First Home Super Saver (FHSS) can help you save for a deposit faster.

The First Home Super Saver (FHSS) scheme is specifically designed to help first-time home buyers save for a deposit by taking advantage of superannuation’s tax benefits. By making voluntary contributions to your super, you can boost your savings at a lower tax rate than if you saved from your regular income. You can withdraw up to $50,000 of these contributions, plus earnings, to purchase a new or existing property, giving you a faster path to home ownership.

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How to use your superannuation to buy property

While using your super to buy property is possible, there are strict regulations to follow. You cannot withdraw your super for property unless you meet specific conditions, such as reaching the preservation age or using certain government schemes. However, there are two main ways to use your super to assist with property purchases.

1. First Home Super Saver Scheme (FHSS)

The First Home Super Saver (FHSS) scheme allows first-home buyers to make voluntary super contributions to save for a deposit. You can withdraw up to $50,000 of your voluntary contributions, along with any earnings, to buy a new or existing residential property. The contributions are taxed at a concessional rate of 15%, which can help you save faster compared to saving from your regular income taxed at your marginal rate. These funds can only be used for a home to live in, not for an investment property or vacant land unless there’s a plan to build.

2. Self-Managed Super Fund (SMSF)

A Self-Managed Super Fund (SMSF) gives you the ability to invest in property, but only for investment purposes. This means you cannot live in or use the property yourself. You can either purchase the property outright using your super fund or take out a loan under a Limited Recourse Borrowing Arrangement. The SMSF option allows you to buy commercial or residential property as part of your investment strategy. However, strict rules apply, and managing an SMSF requires you to comply with Australian Taxation Office (ATO) guidelines.

Using the First Home Super Saver Scheme to buy your first home faster

The First Home Super Saver (FHSS) scheme is a great option for first-home buyers looking to save a deposit quicker. By making extra contributions to your super fund, you can take advantage of the concessional 15% tax rate, which is typically lower than your marginal tax rate. This allows you to grow your savings faster than using a regular bank account.

With the FHSS scheme, you can make before-tax contributions, such as salary sacrifice, or after-tax contributions. You are allowed to save up to $15,000 per financial year, with a maximum total of $50,000. When you’re ready to purchase a property, you can ask the Australian Taxation Office (ATO) to release the eligible contributions along with earnings based on a set interest rate. These funds can then be used for a deposit on a residential property.

Although some tax is still deducted when the funds are released, the overall tax you pay is generally lower compared to saving in a regular account. To get started, you can set up a salary sacrifice arrangement with your employer or make personal contributions. When you’re ready to buy, apply to the ATO to access your FHSS savings and use them towards purchasing your first home.

Who can use the First Home Super Saver Scheme?

To be eligible for the First Home Super Saver (FHSS) scheme, you must meet several criteria that ensure the scheme is used by first-home buyers. These requirements focus on your age, property ownership history, and how you plan to use the property:

Age requirement

You must be at least 18 years old when requesting to access your FHSS funds, although you can make voluntary contributions to your super account before turning 18. The funds cannot be released until you meet the minimum age requirement.

First home buyer

To qualify, you must be a first-time home buyer and have never owned any type of property in Australia. This includes investment properties, vacant land, commercial property, or even holding a company title interest in land. However, if you’ve previously owned property but have experienced financial hardship, you may still be eligible based on government assessment.

Living requirement

You must live in the property for at least six months within the first 12 months of purchasing it, or as soon as it’s practical for you to move in. This ensures the property is used as your primary residence rather than for investment purposes.

First-time applicant

You can only apply to have your funds released from the FHSS scheme once. If you’ve previously accessed the scheme, you are not eligible to apply again.

Eligibility is assessed individually, so if you’re buying a house with a partner, sibling, or friend, each of you can access your own FHSS contributions for the same property.

What are the benefits of the First Home Super Saver Scheme?

The First Home Super Saver (FHSS) scheme offers various advantages for first-home buyers, making it easier to save for a home deposit while using superannuation tax benefits. This scheme helps boost your savings while also reducing your taxable income.

Boosts savings

The FHSS scheme allows you to save more by using the difference between your marginal tax rate and the concessional 15% tax rate on superannuation contributions. You can make both before-tax (salary sacrifice) and after-tax contributions to your super account. These contributions, along with any associated earnings, grow faster than savings in a regular bank account. By using the FHSS scheme, you can accumulate extra money towards your home deposit more efficiently.

Reduces taxable income

When you make concessional (before-tax) contributions through salary sacrifice, your taxable income is reduced, which means you pay less tax throughout the financial year. This can increase your take-home pay while you build up your retirement savings. Additionally, the tax on voluntary contributions is generally lower than your marginal tax rate, helping you save more money for purchasing property.

Per person benefit

The FHSS scheme applies on a per-person basis, meaning that couples, friends, or other fund members can each use the scheme to save for a property purchase. Each person can access up to $50,000 from their super account, potentially doubling the amount available for the deposit on a new residential property. This provides more flexibility when buying property, especially in the competitive property market.

Tax considerations for the First Home Super Saver Scheme

The First Home Super Saver (FHSS) scheme offers significant tax benefits, making it an attractive option for first-home buyers looking to save for a home deposit.

Contributions into your super

Concessional contributions made through salary sacrifice are taxed at a reduced rate of 15%, which is much lower than most people’s marginal tax rate. This tax benefit allows you to put more money towards your home deposit by saving within your superannuation fund. You can also make personal voluntary contributions (after-tax contributions) to further grow your deposit.

Withdrawals from your super

When you request the release of your FHSS savings, the Australian Taxation Office (ATO) withholds tax on the amount you withdraw. The tax is calculated at your marginal tax rate, but with a 30% tax offset, significantly reducing the tax you need to pay on the released funds. This lower tax rate makes it more efficient to save for property through the FHSS scheme than through regular savings in a bank account.

These tax advantages help first-home buyers save faster and keep more of their extra money, making the FHSS scheme a valuable tool for entering the property market.

Can you use your SMSF to invest in property?

Yes, you can use your super to invest in property, but it must be strictly for investment purposes. You cannot purchase a home for personal use through your super fund, and this includes residential or commercial properties. The property must be kept as an investment, providing rental income or capital growth, not for the personal use of any SMSF members.

How can you use an SMSF to buy investment property?

An SMSF can include up to six fund members, and together, you can decide how to invest the fund’s assets, including purchasing investment properties. The property must be rented out to unrelated parties and cannot be occupied or used by any of the SMSF members or their relatives. This applies to both residential and commercial properties. Additionally, if you plan to buy a property using your SMSF, you may need to follow specific rules around borrowing through a Limited Recourse Borrowing Arrangement (LRBA).

What are the rules for SMSF property investments?

When investing in property through a Self-Managed Super Fund (SMSF), strict rules must be followed to ensure compliance. One of the most important regulations is the “arm’s length” rule. This rule requires that all transactions, including property purchases, must be made on normal commercial terms. There can be no special deals or discounts between the SMSF, its members, or any related parties.

In most cases, Self Managed Super Funds aren’t permitted to purchase assets from or lend money to their members or related parties. However, there are some exceptions, such as when acquiring business real property. Understanding who qualifies as a “related party” is essential to maintaining compliance and securing retirement benefits. This definition extends beyond family members and SMSF members, including business partners, their spouses or children, and any company or trust controlled by the member or their associates.

Can you take out a home loan to buy property through an SMSF?

Yes, you can take out a loan to purchase property through your Self-Managed Super Fund (SMSF), but strict borrowing rules apply. This is typically done through a Limited Recourse Borrowing Arrangement (LRBA), where the property is held in a separate trust, known as a ‘bare trust.’ While the SMSF holds beneficial ownership and receives rental income, the legal title remains with the trust. This structure limits the lender’s recourse to the property itself if the loan defaults, protecting other SMSF assets.

Factors lenders consider for SMSF property loans

Lenders will assess several key factors before approving a loan. First, your SMSF typically needs a balance of at least $100,000 to $200,000. Additionally, most lenders require the SMSF to maintain a liquidity buffer, usually around 10% of the property’s value after fees, to ensure cash flow for loan repayments and other expenses like rates and management fees. The Loan-to-Value Ratio (LVR) usually ranges between 70-80%, meaning you’ll need at least a 20-30% deposit. Furthermore, lenders often require that your SMSF receives at least $15,000 in annual contributions to demonstrate ongoing financial support for the loan.

Eligibility and tax considerations

Applying for an SMSF loan involves additional documentation and a more complex approval process compared to traditional home loans. You’ll need documents like certified copies of the SMSF Trust Deed, Custodian Trust Deed, and accountant-prepared financial statements. Not all lenders offer non-recourse loans for SMSFs, as major banks such as Westpac and Commonwealth Bank have discontinued these products. Seeking advice from a mortgage broker or financial advisor is highly recommended to navigate the complexities of the loan process and ensure compliance with tax obligations.

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This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.