How to use your Super to fund your Home Loan Deposit?
In Australia, you cannot use your super towards your home loan deposit unless you are a first home buyer who has made extra super contributions under the recently introduced First Home Super Saver scheme (FHSSS).
Under this scheme, FHBs can make voluntary contributions to their superannuation account that can be later used as a deposit for their house. As per the regulations, you can contribute a maximum of $15,000 a year and a total of $30,000 per person. So, even if you were purchasing a property with your spouse, you can only save a maximum of $60,000 over two years that can be used towards your home loan deposit.
You can make two types of contributions towards the First Home Super Saver scheme:
- Voluntary concessional contributions or contributions for which tax deduction has been claimed. These are taxed at 15 per cent.
- Voluntary non-concessional contributions for which tax has not been claimed.
According to some, the cap of $15,000 per person in a financial year and $30,000 per person across all financial years limits the benefit of the scheme. However, a major advantage is that you earn a higher rate of return on your money in a super fund as compared to a savings account. Besides, you pay a lower tax on the funds at a rate of 15 per cent while effectively reducing your pre-tax income if you opt to salary sacrifice.
Note that when you withdraw money, pre-tax contributions will be taxed at your marginal rate minus a 30% offset. No tax is charged on post-tax contributions.
Also, remember that you must sign a contract of sale or construct a home within 12 months of the release of the savings under the scheme.
Can I use my super for a house deposit?
You can use your super for a deposit if you are a first home buyer or buying an investment property through a Self-Managed Superannuation Fund (SMSF).
As a first home buyer, you can utilise the First Home Super Saver Scheme that allows you to withdraw the additional contributions made under the scheme to purchase your first home.
To be eligible for FHSSS:
- You must be over 18 years of age
- Should have never owned property in Australia in the past
- Must live in the property for a continuous duration of 6 months within the first 12 months of purchase
In case you have owned a property before but faced financial hardship that led to the loss of ownership, you may still be eligible for FHSSS. Speak to a mortgage broker to understand your options better.
Using your super to purchase an investment property
It is possible to invest in property using your super by setting up a Self-Managed Superannuation Fund or SMSF.
What is SMSF and what are its benefits?
SMSF is a trust set up for the sole purpose of providing for your retirement. In the SMSF structure, the members act as trustees and are also responsible for running the fund. The ATO lays down strict tax regulations for SMSFs and non-compliance could lead to heavy penalties.
An SMSF gives you access to a broad range of investments, such as shares, property or even a wine or car collection. The aim is to invest in diverse asset classes to minimise market risk and maximise the returns.
Investing in property is a popular option for SMSFs. However, complex rules regulate financial borrowings for SMSFs and not understanding these could lead to severe legal implications.
In general, SMSFs can purchase a property by using the cash in the fund. An SMSF can also borrow money from a financial institution under a Limited Recourse Borrowing Arrangement (LRBA) so that the property is held in the name of a Security Trustee (other than the SMSF) under a special purpose trust during the life of the loan. Note that you need a 30 per cent deposit to qualify for a loan.
There are several advantages of investing in property through SMSF:
- The rental income from the property is taxed at a rate of 15 per cent. No tax is payable if the fund is in the retirement phase.
- No capital gains tax is payable when the property is sold in the retirement phase.
- Under an LRBA, the lenders’ right to recourse in the case of default is only limited to the assets held by the special purpose trust.
However, the cost of setting up an SMSF could often outweigh the benefits. Besides, complex rules govern the process, and it is important to consult an expert to structure your loan correctly. If you wish to use your super to invest in a property, speak to a mortgage broker to make an educated decision.
You can read more about SMSFs.
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By Vidhu Bajaj,
HashChing Content Writer