The Ultimate Guide to Using Superannuation to Buy a Property
Superannuation can undoubtedly be a blessing for Australians seeking innovative methods to enter the real estate market. However, using superannuation to buy a house is far more complicated than most people think.
Depending on your circumstances, there are three main approaches to achieving this: using the First Home Super Saver Scheme, setting up a Self-Managed Super Fund, and using superannuation once you have reached preservation age. Let’s talk about every possible option here to help you achieve your objective of buying a property using your super.
Exploring the First Home Super Saver Scheme (FHSS)
The FHSS scheme enables first-home buyers to withdraw additional contributions to their superannuation to buy a property. Essentially, it helps first-time buyers save for a deposit much quicker. The major benefit of this scheme is that the contributions under it are taxed at a concessional rate of 15%, which can be well below your marginal tax rate. That makes saving for a deposit more efficient. Eligible contributions include salary sacrifice agreements (pre-tax contributions) and voluntary personal contributions (after-tax contributions).
Application to access the FHSS must be made only by persons above 18 at the application date who have never owned real property in Australia. They should meet at least the minimum residency requirements. Plus, they need to stay at least six months within the first 12 months of ownership in the dwelling they want to buy through FHSS.
If you’re interested in FHSS, you must apply to the ATO for an FHSS determination and release of funds. Contributions made under the scheme are tied up for property purchases, so if you decide not to buy, the funds remain in your super account until retirement. The scheme is assessed individually, meaning couples or friends can combine their eligible contributions for the same property.
Understanding Self-Managed Super Funds (SMSFs)
If you’re considering buying property using superannuation for investment purposes, an SMSF might be the solution. This option allows Australians to use their super to buy investment properties under strict conditions. SMSFs can only purchase investment properties, and buying property to live in is not allowed. Trustees must keep a liquidity buffer, typically 10% of the investment’s value, in cash or shares within the fund. Financing through SMSFs usually involves a Limited Recourse Borrowing Arrangement (LRBA), where legal ownership is held in trust. If you're planning property improvements, working with a home renovations builder can help ensure compliance with SMSF regulations while enhancing the investment’s value.
Banks typically lend only up to 70% of the property’s value, and Lender’s Mortgage Insurance (LMI) cannot increase this amount. Setting up an SMSF is complex and requires professional advice to navigate regulations. Transactions must adhere to “arm’s length” rules, meaning assets cannot be purchased from, or lent to, fund members or related parties. Related parties include relatives of members, business partners of members or their spouses, and companies or trusts controlled by the member or their associates. With these restrictions in mind, consult a financial expert before moving forward with this option.
Using Your Super to Buy a House When You Reach Preservation Age
Once your preservation age is reached—which is usually 60 years if you’re retired and 65 years if you are still working—you can access part or full superannuation to purchase property, pay off mortgages or for any intended use. Large withdrawals from your super will cut down future earnings; therefore, caution regarding the long-term effects is key to making prudent decisions. Lending post-retirement can also be quite difficult since this may considerably affect your purchasing power. You must understand the tax implications, too. So, seek the help of a financial planner to explore the best avenue in your case.
Why Work with U Buyers Agents?
As illustrated through the three options below, using superannuation to buy a property requires expert guidance. At U Buyers Agents, we provide professional buyer’s agent services to ensure your property purchase aligns with your financial goals. From helping you understand the steps for buying a property to tailoring strategies that work for your circumstances, our team is here to make the process seamless and stress-free.
Considering your options of buying property using super through the FHSS scheme, SMSF, or post-retirement access? We’ll guide you to make informed decisions and avoid common pitfalls. Contact U Buyers Agents today.