Can You Use Super to Buy a House?

Yes, you can buy a house through super (superannuation). However, since superannuation is meant to be used for retirement savings, buying a home using super can be quite complex – but still very much possible. 

In other words, unless you’re a retiree who’s reached preservation age (the age at which you can start withdrawing super), you can’t simply withdraw the money you’ve saved in your super over the years to buy a home.

Typically, there are three ways to buy a home through your superannuation fund:

• First Home Super Saver Scheme (FHSSS)
• Self-Managed Super Fund (SMSS)
• Meeting age eligibility requirements for superannuation (60 if retired or 65 if still working)

Let’s break down these methods to make it easier for you to understand what you’re getting yourself into:

Purchasing property through First Home Super Saver Scheme (FHSSS)

The First Home Super Saver Scheme is a plan set up by the Australian federal government to help home buyers use additional superannuation savings to build up their home deposit funds as fast as possible.

First-home buyers can quickly save up for their home deposit using FHSSS since some superannuation contributions are taxed at a concessional rate of 15%, not the usual marginal rate.

As the name suggests, this option is only available to first-time home buyers. Also, savers use their voluntary personal super contributions, not their employers’ contributions.

How does FHSSS work?

As a first-time home buyer looking to use additional superannuation savings to buy a home, you can make voluntary concessional (before-tax) or non-concessional (after-tax) contributions which you can later withdraw to help you with the purchase.

You can contribute up to $15,000 per financial year, and up to a maximum of $50,000.

The first $25,000 that goes into the account annually is taxed at only 15%, instead of the standard marginal tax rate. This threshold is for any compulsory contributions made by your employer as well as your voluntary contributions.

Due to the tax, you’ll likely save less than $15,000 per year. For this reason, some people might argue that saving in a bank account is better. However, you’ll still save more in your super than a bank account which gets taxed at the standard marginal rate.

You can start saving into your FHSSS account by having a salary sacrifice agreement with your employer (before tax contributions) or through voluntary personal super contributions (after tax).

Steps in using FHSSS to purchase property

There are a few steps to follow when using FHSSS to purchase your first home. Once you’re ready to buy, your first contact is the Australian Taxation Office (ATO), not the superannuation fund.

You apply for a withdrawal of your additional contributions and any deemed earnings on that money (based on the shortfall interest charge).

Here’s the step-by-step process of withdrawing your FHSSS contributions:

1. Log in to your myGov account and apply for an “FHSSS determination and release” to the Commission of Taxation.
2. The commissioner will process and provide your “FHSSS determination”
3. You’ll make an application for funds release to the ATO
4. The ATO will release an authority to your superannuation fund to send a request to the ATO to release the amount
5. The ATO will calculate and take away any tax you owe and offset against any outstanding Commonwealth debts
6. The funds will then be sent to you.

Keep in mind that you can only apply for a release of funds once. That’s why it’s important to ensure that you’re ready to buy the property before making your application.

Eligibility requirements for FHSSS

You might be eligible to buy your home under the FHSSS scheme if:

• You’re over the age of 18 years when requesting release of funds. You might be eligible for contributions before you turn 18 years old.
• You’re a first-home buyer. You must not have owned a property in Australia before (whether a residential property, commercial property, vacant land, or a lease of land). If you’ve owned Australian property before, you might still be eligible if the government determines that you’ve faced financial hardship.
• You intend to be the owner-occupier of the property. You have to live in it as soon as you can and live there for at least 6 months within the first 12 months of buying it. This means the FHSS scheme isn’t a viable option for investment properties.
• You’ve never applied for a funds release previously

FHSSS eligibility is determined on an individual basis. Couples, friends, or siblings can partner up and each access their contributions to buy the same property.

Pros and Cons of FHSSS

Let’s look at the advantages and potential downsides of buying your house through FHSSS:

Pros

• Concessional contributions made through salary sacrifice can lower the taxable income
• You can boost your savings by saving the difference between the standard marginal tax rate and the 15% concessional tax rate
• The benefits are per purchaser, not per property. Couples enjoy double the benefit
• FHSSS isn’t affected by falling markets

Cons

• Salary sacrificing means you take home less pay
• You can only use the savings to buy your first home. If you don’t use the money to buy a home, the funds aren’t available until you retire
• Based on the total value of the property you intend to buy, the FHSSS may not be sufficient to cover the full deposit
• Government policies are bound to change

How much super can I withdraw using FHSSS?

You can access up to $15,000 of your voluntary contributions from any one financial year, and up to a total of $50,000 across multiple financial years plus any associated earnings.

Associated earnings are a notional amount of earnings calculated at the shortfall interest charge rate.

Example: Sydney Couple uses FHSSS to buy their first home

James has been working as an air traffic controller for the past 3 years and has amassed a total of $50,000 in FHSSS savings through salary sacrifice and employer contributions. James has never owned a home before and wants to find a home.

James’ wife, Elena, is a lawyer and has also accumulated $50,000 in her super. 

The couple can withdraw a total of $100,000 to put down as a deposit and enjoy double the benefit of using FHSSS to buy their first home.

When do you need to purchase a house with FHSSS?

As for the timelines, since there’s a lengthy process to get a release of funds through the FHSSS, it takes around 20-25 business days for your superannuation fund to release and pay your contributions.

This is on top of the 10-15 business days it might take the Commission of Taxation and ATO to determine your application and other paperwork.

Once the savings have been released, you have up to 12 months to sign a contract of sale. You can request an extension for another 12 months (24 months in total).

If you’ve still not signed a contract of sale after the 24 months, you must either:

• Recontribute an equal amount to the FHSSS released funds into your super fund, less any tax withheld. This amount is stated in your payment summary and may be less than the total amount released to you. This amount is a non-concessional contribution and you can’t claim a tax deduction from it.
• Keep the released amount and be subject to FHSS tax, which is a flat amount equal to 20% of your released funds.

Purchasing through a Self Managed Super Fund (SMSF)

In Australian law, an employer is required to put money into your superannuation fund on your behalf while you’re working. This fund ensures that you have an income once you retire and is managed by your superannuation provider.

However, you can choose to manage your account through a self-managed super fund (SMSF). This is a private self-managed superannuation fund that you can use to purchase investment property. 

Keep in mind that the property must be for investment purposes— not to live in. 

You can include up to four members in your SMSF, all considered trustees. You and the other members make fund decisions, such as how to invest the superannuation and compliance with laws.

An SMSF gives you more control over your superannuation by allowing you to decide:

• How much money to pay into it
• Where and how much of it to invest

If you’ve got enough money in your super then you can buy the property outright or you can take out a loan through an LRBA.

Compliance and regulatory requirements for SMSF

Setting up and running an SMSF is highly regulated. It’s important to understand all the legal requirements before choosing this opinion. 

Here’s a breakdown of the rules and regulations you should know about:

• Sole purpose test – The SMSF property must be used solely to provide retirement benefits for the members. In short, you can’t buy the property for personal use or to rent to family members.
• Related parties – You can’t use your SMSF funds to purchase a property from a related party. Also, you can’t rent the property out to a related party or transfer your existing residential investment property into your super fund. SMSF “related parties” include each member’s relatives, each member’s business partner, those business partners’ spouses or children, any company controlled or influenced by any member, and any trust controlled or influenced by any member.
• Market value rule – Your SMSF must make property investments at a commercial “arm’s length”. This means that the properties must be valued at the current market price and any leases should reflect the current market value in the open market for a property of that type.
• Assets in the name of the fund – All property investments made must be in the name of the SMSF fund, not your name.
• Borrowing arrangements – If you don’t have sufficient funds in your SMSF to buy the investment property outright, you may establish a limited recourse borrowing arrangement (LRBA). This is a specific loan type for SMSFs that gives you access to funds to buy the property. The property is held in a separate trust until you’ve fully repaid the loan.
• Property acquisition costs – Your SMSF must cover the property acquisition costs, such as stamp duty, legal fees, and title transfer costs. You must ensure that these costs are directly related to the property purchase and comply with the superannuation laws.

Pros and Cons of buying property with SMSF

Let’s break down some of the pros and cons of buying an investment property through an SMSF:

Pros

• SMSFs are tax-effective structures. Holding an investment property through an SMSF offers numerous tax benefits. For example, super funds are only taxed at 15%. You also enjoy a capital gains tax discount if you own the property for at least 12 months.
• It’s a great way to invest in a property if you don’t have enough bank savings to make a deposit or you aren’t old enough to access your super
• If you take out a loan to buy the property through SMSF, the interest payments are tax-deductible

Cons

• Owning a property through an SMSF can present cash flow challenges. You must ensure that the property generates enough cash flow to cover your expenses. It also costs more to buy a property through an SMSF, especially with an LRBA
• Buying a property through an SMSF is time-consuming and complicated. If you don’t get it right, you could face expensive penalties
• If you use a significant portion of your super to buy the property, you risk having less asset diversification. This could affect your retirement savings if the property value falls

Purchasing property at retirement age

You can access your superannuation once you’ve hit preservation age (60 years for most people) or reached 65 years and you’re still working. You can take it all out (or a portion of it) and use it to buy a house, pay off a mortgage, or for any other purposes. 

While using your super to pay off an outstanding debt, such as a mortgage, may mean you have less money in your pension, it makes sense since you won’t have to make monthly mortgage payments. Depending on the outstanding balance, you’ll also save on the mortgage interest, which could amount to hundreds or even thousands of dollars.

If you want to use your super to buy a home, it might make more sense to buy the home outright if you have access to more funds. This is because not many lenders in Australia have long-term financing options for seniors unless you have a stable retirement income, significant savings, or other assets to help you repay the loan.

When it comes to taxes, once you take out your super at retirement age, it’s no longer considered super. If you invest the amount, you must declare it on your tax returns.

Pros and Cons of using super to purchase property at retirement age

Here are some pros and cons of using super to buy property at retirement age:

Pros

• There are no limitations to the type of property you have to buy using super at retirement age
• You can use your super after retirement to pay off your outstanding mortgage or carry out renovations on your current home to increase its value
• If you have a substantial super balance, you could use it to purchase a home outright or use it as a significant deposit which reduces your loan-to-value ratio (LVR) and gets you a better interest rate

Cons

• Getting a mortgage after retirement could cause financial distress if other expenses, such as healthcare or aged care services arise
• Taking out a mortgage after retirement could be an uphill task since most lenders worry that the loan could extend your capacity to fully repay the loan
• You might have to pay capital gains tax if you buy and sell properties outside your super

Looking to use super for your dream property?

In a nutshell, it’s possible to use super to buy your dream property. There are various ways to help you do this, namely First Home Super Saver Scheme (FHSSS), Self-Managed Super Fund (SMSS), and waiting until retirement to take out your superannuation savings.

There are various advantages, disadvantages, and eligibility requirements for each of these methods. This is why it’s important to get professional advice to understand the best strategy for your case.

Book a free initial consultation with our team at Wayfinder Agency for expert assistance in finding your perfect property.