If you’re considering buying property, you might be wondering if you can use your super money to go towards a deposit or mortgage.
There are strict rules around when you can access your super because it’s intended to provide financial stability during retirement. However, you can make contributions to super as a tax-effective way of saving to buy property.
Saving for a house with the First Home Super Saver Scheme
In the 2017 federal budget, the government introduced the First Home Super Saver Scheme to help first home buyers enter the property market. The scheme is intended to increase the amount of money people can put towards a deposit thanks to the concessional tax rate and the higher rate of earnings through super.
As of 1 July 2017, you can make voluntary contributions into a superannuation account to save for purchasing a first home. As of 1 July 2018, contributions and returns made can be withdrawn at a concessional tax rate to put toward a house deposit.
Most people can salary sacrifice income to make pre-tax contributions to super as part of the First Home Super Saver Scheme. If you’re self-employed or don’t have the option to salary sacrifice, you can still make contributions and claim a tax deduction.
These voluntary contributions are included in the total super contribution cap for each financial year.
Pros and cons of the First Home Super Saver Scheme
For many people, the First Home Super Saver Scheme is a tax-effective way to save for a first home. However, it’s worth going over the positives and negatives.
- Tax advantages – Money put into super from pre-tax income or as a voluntary contribution is taxed at a discounted rate, as are earnings generated. Plus, investing in the scheme can reduce your taxable income, and therefore lower the tax you pay on your income.
- Higher returns – Typically, you will earn more on your investment than you would by putting your money into a savings account.
- Contributions are made individually – If you’re part of a couple, you can both make contributions to the scheme within separate caps, then withdraw to put toward the one home deposit.
- Funds can only be used to buy a property – Once you make contributions to your super, funds can only be withdrawn for the purpose of buying a property. Otherwise, it’ll be locked in your fund until your reach your preservation age.
- Returns are fixed – The rate of return on contributions within the scheme is fixed. This means if your fund makes a bigger return, the additional money will stay in your account until you retire.
- You may not have enough for a deposit – Depending on where you live in Australia, the money you’ve saved through the scheme may still not be enough for a deposit on a home – meaning you could also have to dip into other savings.
Can you invest in property through super?
If your super is part of a managed fund, some of your investment mix will typically include investments in property. In these cases, your fund’s trustee is responsible for investing your money. So, while you may be able to choose what percentage of your money you want to go towards property, the investment decision-making ultimately lies with the trustee.
If you have a self-managed super fund (SMSF), you can use your money to borrow and invest directly in property. However, the property has to be deemed as solely providing retirement benefits to fund members (i.e. you). That means it must be purchased as an investment rather than to live in.
Rules for buying property through an SMSF
To buy property through a self-managed super fund, the following rules apply:
- The property has to be bought for the sole purpose of providing retirement benefits to you
- You can’t buy the property from a relative or anyone associated with your SMSF
- The property can’t be lived in by you or anyone associated with your SMSF
- The property can’t be rented by you or anyone associated with your SMSF
While you can’t buy a property to live in through an SMSF, it is possible to buy a property that you use for business purposes – allowing you to pay rent to your SMSF.
Borrowing money with an SMSF to buy property
Generally, your SMSF can’t borrow money, but there are some exceptions, such as if you need cash to pay a member’s benefit or settle a share transaction. You can also borrow (“gear”) your super into property by investing in managed funds that borrow money.
Borrowing money to buy property using a self-managed super fund happens under strict borrowing conditions called a 'limited-recourse borrowing arrangement'. This arrangement can only be used to purchase a single asset, such as a residential or commercial property.
There are a number of risks to gearing an SMSF, such as higher loan costs, tax losses and the potential for substantial losses to your super. If you’re considering moving to an SMSF or borrowing through an SMSF, talk to a financial professional to make sure you understand the risks and obligations.