We've all heard, and many of us experienced, how difficult it can be to save up for a home deposit. Not only does it require a lot of patience and diligence from a cash flow perspective, but at the same time home prices increased significantly in recent years, and banks are making it harder to borrow. Being in the process of saving for a first home myself, I thought I would share how saving for your first home through super can make a big difference.
What's the basic principal?
The idea behind the First Home Super Saver Scheme (FHSSS) is that money contributed to your super fund is not taxed at your personal marginal tax rate, but instead at superannuation rates of 15%. Most of us will have a personal marginal tax rate between 19% and 37%, so there is an immediate, and likely substantial tax benefit from saving in super rather than personally.
What about investment returns?
What I found frustrating about saving for a home deposit using a personal bank account is the low interest rate. Some banks offer bonus interest for a few months, or if certain conditions are met, but even then the interest rate is only around 2%.
Things get much more appealing when saving for your first home through super. Although your super fund returns will depend on the performance of global investment markets, the interest generated on your first home savings in super will be calculated by the ATO, and is based on Government interest rates, and not the performance of global markets. At the time of this blog the interest rate applied to home savings inside super is 4.96%. This is significantly more than interest on a bank account.
A practical example
If we assume a person earns a gross salary of $60,000 pa ($1,154 pw) and they need $730 pw to meet their lifestyle and living expenses, then the following table compares how much they could save in a personal bank account, compared to saving through super.
In this scenario the person would be able to save $188 pw in a personal bank account and still have $730 available to meet expenses. However, if they made pre-tax savings into super instead they would be able to save $287 pw. Once the superannuation contributions tax of 15% is deducted, the weekly amount saved through super is $244.
So by using super, savings can be increased by $56 per week without any impact on lifestyle. And, as mentioned above the savings in super will be earning much higher interest.
What are the rules?
There are several rules around:
How the super savings are accessed
How much can be saved through super
Eligibility to use the scheme
Going into all the rules would be too much for this blog, so I will only cover off on the main points. For further details you can download the ATO's FHSSS Fact Sheet or visit the ATO's webpage on the scheme.
To use the scheme you must not have had any interest in Australian property currently or in the past. This includes partial ownership of property, regardless if it was a home or investment. It's important to note that each buyer is assessed independently. Therefore if John has had an interest in a property before, but his wife Jane has not, Jane can still utilise the scheme.
The property being purchased must be for the purpose of living in.
How much can be saved?
You will only be able to withdraw contributions you have made in addition to your employer super contributions.
A maximum of $15,000 pa of your additional contributions are counted towards the home savings that can be withdrawn. Also keep in mind that your total pre-tax super contributions, including your employer super contributions, are subject to an annual cap of $25,000.
How are the savings withdrawn?
The maximum that can be withdrawn from super is $30,000 in contributions per person, plus any interest generated on those contributions.
The interest earned on the contributions will be taxable personally upon withdrawal. However, a 30% tax offset will be applied. Given that most first home buyers will have a tax rate close to 30%, the offset negates most of this tax. Therefore, even after accounting for this tax, the scheme still delivers much better results than personal savings in many cases.
To withdraw the savings you will need to lodge a request with the ATO.
Once you receive the funds you must use all of it for a home deposit within 12 months.
Tips for getting set up
Start off by working out a budget, which will show you how much you can save. For some tips and a template you can read our blog on budgeting.
Use this calculator, entering the savings amount from step 1 in the super contributions section.
The calculator will then work out how much you can contribute to super while still having the same disposable income as saving in a personal bank account.
As mentioned earlier, you will need to make sure that the amount you contribute to super for your first home deposit does not exceed $15,000 pa, and your total pre-tax super contributions, including employer super, does not exceed $25,000. If the calculator in step 3 recommends an amount that will reach either of these limits you will need to consider saving through super and personally for your first home.
So, there are significant tax and savings benefits from utilising the First Home Super Saver Scheme. However, there are a few rules that need to be followed and some planning and budgeting to make sure you take full advantage of the system.
If you are considering the scheme, we recommend that you seek personal financial advice. The information provided in this article is of general nature only and is not specific to your situation.
Feel free to book a phone call or appointment (links at bottom of page) with us if you would like to discuss the topic further.
Disclaimer: The information provided in this presentation is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions. Please seek personal financial advice prior to acting on this information.