Can I Use My Super to Buy a House

Many Australians wonder, “Can I use my super to buy a house?” The short answer is yes, but there are specific rules and considerations. This comprehensive guide explores the possibilities of using superannuation for home ownership, including buying property with super and accessing super to buy a house.

Understanding Superannuation and Property Purchase

Superannuation, or ‘super’, is Australia’s retirement savings system. While its primary purpose is to fund your retirement, there are ways to use your super to buy a house or invest in property. Before we delve into the specifics, it’s crucial to understand how superannuation works.

How Superannuation Works

• Employer Contributions: Your employer must contribute 10.5% of your ordinary earnings to your super account. This is known as the Superannuation Guarantee (SG).
• Voluntary Contributions: You can make additional contributions to boost your super balance.
• Investment Returns: Your super fund invests your money to grow your wealth over time.
• Preservation: Generally, you can’t access your super until you reach your preservation age (between 55 and 60, depending on your birth date) and retire.

Can You Buy a House with Super?

Yes, you can use your super to buy a house, but the process depends on whether you’re a first-time homebuyer or looking to invest. Let’s explore the two main ways of using superannuation for property purchase.

First Home Super Saver Scheme (FHSSS)

The FHSSS allows first-time homebuyers to use superannuation for home deposits. Here’s how it works:

1. Make voluntary contributions to your super account. These can be before-tax (salary sacrifice) or after-tax contributions.
2. You can withdraw up to $15,000 of voluntary contributions from a single financial year, or up to $30,000 in total, plus associated earnings.
3. Use this money as a deposit on your first home.

For example, if you salary sacrifice $5,000 per year into your super for three years, you could withdraw $15,000 plus earnings to use as a deposit on your first home.

This scheme effectively allows you to use your super to buy a home, albeit indirectly. The benefit is that you’ll likely pay less tax on these savings compared to saving in a regular bank account.

Click here to learn more about the First Home Super Save Scheme.

Can I Use My Super to Buy an Investment PROPERTY?

Yes, you can use your super to buy an investment property, but you’ll need to set up a Self-Managed Super Fund (SMSF). This option allows for buying property with superannuation, subject to strict rules:

• The property must generate rental income.
• Fund members or their relatives cannot live in the property.
• The investment must comply with superannuation laws.
• The property purchase must align with the fund’s investment strategy.

For instance, if your SMSF has a balance of $500,000, you could use this to purchase an investment property. You’d need to ensure the property is rented out at market rates and that all rental income goes back into the SMSF.

Here is a comprehensive guide on the do’s and don’t of SMSF Lending.

If you are unclear what the differences are between a regular super fund and a self managed super fund, here is an excellent guide explaining the key differences.

Steps for Accessing Super to Buy a House

If you’re considering using super to buy investment property or accessing super to buy a house, follow these steps:

1. Determine your eligibility based on the relevant schemes (FHSSS or SMSF).
2. Consult with your super fund, financial advisor or an SMSF Mortage Broker to understand the implications.
3. If proceeding, complete and submit an application with the required documentation.
4. For FHSSS, apply to the ATO to release your funds.
5. For SMSF, establish the fund and develop an investment strategy.
6. Await the review and approval process.
7. Once approved, proceed with your property purchase.

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Can I Withdraw My Super to Buy a House?

Generally, you can’t simply withdraw your super to buy a house. However, there are specific circumstances where you can access your super for property purchase:

1. Through the First Home Super Saver Scheme for first-time buyers.
2. By setting up an SMSF to buy an investment property.
3. In cases of severe financial hardship (subject to strict criteria).

It’s important to note that accessing your super early can have significant impacts on your retirement savings. For example, withdrawing $30,000 at age 35 could reduce your super balance at retirement by much more, due to the loss of compound interest over time.

Using Superannuation for a House Deposit

The FHSSS allows for using superannuation for home deposits. This can be an effective way to save for a deposit, as your contributions may benefit from the concessional tax treatment within super.

For example, if you’re in the 32.5% tax bracket, a $1,000 salary sacrifice contribution to super would only reduce your take-home pay by $675, due to the 15% tax rate on super contributions. This means you could potentially save your deposit faster using super compared to a regular savings account.

Buying a House with Your Super: Pros and Cons

Advantages OF BUYING A HOUSE WITH SUPER

1. Tax benefits: SMSF investments often have favourable tax treatment. For instance, rental income is taxed at 15% within an SMSF, which could be lower than your personal tax rate.
2. Portfolio diversification: Property can help spread your investment risk across different asset classes.
3. Potential for earlier property ownership through the FHSSS.
4. Possible protection of assets in some circumstances.

Disadvantages OF BUYING A HOUSE WITH SUPER

1. Complexity: Managing an SMSF requires time, knowledge, and ongoing compliance with super laws.
2. Reduced flexibility: Property investments can be harder to sell quickly if you need to access funds.
3. Potential impact on retirement savings if the investment underperforms.
4. Costs: Setting up and running an SMSF can be expensive, with ongoing auditing and reporting requirements.

Alternative Ways to Buy a House

If you decide against using super to buy a home, consider these options:

Traditional Mortgages

• Fixed-rate loans offer consistent repayments. For example, a $400,000 loan at 3% fixed for 5 years would have repayments of about $1,897 per month.
• Variable-rate loans may have lower initial rates but can change over time. The same loan at 2.5% variable might start at $1,778 per month but could increase if rates rise.
• Check your borrowing capacity for free

Government Assistance Programs

• First Home Owner Grant provides financial help to eligible first-time buyers. The amount varies by state but can be up to $20,000 in some areas.
• First Home Loan Deposit Scheme allows some buyers to purchase with as little as 5% deposit, without paying Lenders Mortgage Insurance.

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Is Buying Property with Super Right for You?

Consider these factors when deciding whether to use your super for property investment:

• Your age and proximity to retirement: The closer you are to retirement, the more cautious you should be about making significant changes to your super.
• Your current savings and overall financial situation: Ensure you’re not overcommitting yourself financially.
• The state of the property market and broader economic conditions: Property prices and rental yields can vary significantly over time.
• Your risk tolerance: Property investment, like any investment, carries risks.
• Your long-term financial goals: Consider how property investment aligns with your overall financial strategy.

Case Study: Using Super to Buy Investment Property

Let’s consider a hypothetical example. Sarah, 45, has $300,000 in her SMSF and decides to use $250,000 to purchase an investment property valued at $500,000, borrowing the remaining $250,000.

Pros

• Rental income of $25,000 per year is taxed at 15% within the SMSF.
• Capital gains, if the property is sold after 12 months, are effectively taxed at 10%.
• Sarah has diversified her super investments.

Cons

• Sarah’s SMSF now has less diversification and liquidity.
• There are ongoing costs for property management, maintenance, and SMSF administration.
• If property values fall or interest rates rise significantly, it could impact Sarah’s retirement savings.

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Final Thoughts on Using Super to Buy Investment Property

Using super to buy a house or investment property can be a way to enter the property market or diversify your investment portfolio. However, it’s a significant decision that can impact your financial future.

Before deciding to access your super to buy a house or use your super to buy an investment house, consult with a financial advisor or SMSF mortgage broker. They can help you understand if buying property with superannuation aligns with your long-term financial goals and retirement plans.

Remember, the primary purpose of your super is to provide for your retirement. Any decision to use these funds for property should be made carefully, ensuring it doesn’t compromise your financial security in later years.

By understanding the rules and implications of using your super to buy a home or investment property, you can make an informed decision about whether this strategy is right for you. Whether you’re considering using superannuation for a home deposit or buying property with super, always consider your long-term financial well-being and seek professional advice.

Book your free consultation with us today for personalised guidance in navigating your options of buying property with super.