Super Investment: How To Use Super To Buy A House

The real estate market in Australia is red hot right now, which is driving up prices year over year. Therefore, if you are interested in entering the market, using some of your retirement savings as a down payment could turn out to be the finest choice that you make. Everything you need to know about using your retirement savings to buy property in Australia is included in this guide.

The superannuation scheme is an important component of the retirement savings system in Australia. One of many options available for using it to purchase a home is to use it towards the down payment or closing costs. In this piece, we'll take a look at the various ways that retirement savings can be utilised to purchase a home, and we'll also provide some pointers on how to get things rolling.

You've come to the right place if you've been pondering the best way to use your retirement savings towards the purchase of a home. In order for you to get the most out of the money you've worked so hard to save, this manual will walk you through the entire procedure step by step.

The purchase of a home is a significant undertaking, but with the assistance of super, it is possible to bring this goal within reach. What exactly are you looking forwards to? Get the ball rolling right now!

When it comes to having the opportunity to own their own home, Australians are among the luckiest people in the world. When compared to many other countries, entering the market in the United States is typically less difficult and expensive to do.

Using the money you have saved in your superannuation to buy a home is one method to make the process even less difficult. In this section, we will discuss how this may be beneficial to you.

Are you looking to purchase a house but haven't saved up enough money? If you're in your twenties or thirties, there's a good chance that you can use your superannuation to get into the property market.

In this article, we will discuss how retirement savings can be put towards the down payment on a house, and we will also offer some advice on how to get the most out of this investment. Continue reading if you wish to obtain further information.

There are many different options available to save money for a down payment on a property, despite the fact that it may seem like an impossible undertaking at first. One option that a lot of people aren't aware of is the possibility of using their retirement savings as a down payment on the house of their dreams.

This article will explain how you can utilise your retirement savings to buy property, as well as any restrictions that may apply to your transaction.

You might be shocked to learn that you can make use of your pension or 401(k) to assist you in purchasing a home. There are a few distinct approaches you might use to accomplishing your goal. This could be an excellent strategy to begin climbing the real estate ladder or enter the market at an earlier stage. Here is the information that you require.

The completion of the mortgage payment is a goal that many people who own their own homes hope to achieve. It is possible for it to bring both mental and financial security. If you are interested in purchasing a home, using some of your retirement savings as a down payment could turn out to be the most astute decision you make.

Even though there are limits to the amount of money you can take out of your retirement fund for a down payment on a property, it is still possible to do so as long as you plan things out in advance.

Let's get started!

What exactly is meant by the term "self-managed super fund"?

A self-managed super fund, or SMSF, is a private super fund that is managed by its owners. Investors are able to store a wider variety of assets, including shares, term deposits, bonds, investment properties, cash, and unlisted assets, while using SMSFs because they offer greater flexibility and allow for this.

A successful self-managed super fund (SMSF) can bring in significant rewards, but it also comes with the potential for greater risk than a licenced super fund does. The management of an SMSF also needs some effort, and it is essential to obtain the advice of a reliable financial consultant when making decisions.

SMSFs are allowed to have a maximum of four members and are required to have their very own unique Tax File Number (TFN), Australian Business Number (ABN), and transactional bank account.

Because SMSFs are a form of trust, you are required to appoint a trustee who will be responsible for the investment strategy, administrative responsibilities, and financial statements of the SMSF.

Who Is Eligible To Withdraw Superannuation For A House Purchase?

First-time homebuyers, property investors, and people over the age of 65 who are considered retirees are the three primary categories of homebuyers who are eligible to utilise their superannuation to acquire a home.

1. New Homeowners

The First Home Super Saver Scheme is a programme run by the federal government that allows first-time homebuyers access to their superannuation funds (FHSSS).

However, it is essential to keep in mind that the programme only enables first-time buyers to use their own personal voluntary payments to superannuation rather than the mandatory contributions that are made by their employers.

Either contributions made prior to taxation (typically as part of a salary sacrifice arrangement or to create a tax deduction) or contributions made after taxation (from income that has already been taxed) can be withdrawn to add to the down payment on a first home. The total amount that can be withdrawn is capped at $30,000.

This means that if you are a couple, you have the potential to free up to $60,000 in funds. In addition, beginning on July 1, 2022, the amount of money that can be withdrawn through voluntary contributions will increase to a maximum of $50,000 per individual and $100,000 per married couple.

2. Real Estate Investors

If you are a member of a Self-Managed Super Fund, often known as an SMSF, you have the ability to borrow money from the fund in order to purchase an investment property.

The Australian Taxation Office (ATO) classifies this kind of investment as having a "sole purpose," which means that it can only be used to provide retirement income for members of an SMSF.

It is also confined by stringent rules. For instance, you are not permitted to live on the property, while you are free to use it as your primary house after converting it.

3. Those Who Are Over 65 Or Retired And Have Reached "Preservation Age"

If you are not a first-time buyer and you are not a member of a self-managed super fund, the only other case in which you can utilise your retirement savings to purchase a home is when you have unrestricted access to your superannuation.

You are granted full access once you achieve "preservation age" and have retired or when you turn 65 years old, even if you haven't yet retired from your job.

The term "preservation age" refers to the age at which your retirement benefits become a "preserved benefit."

Your date of birth is the primary factor that the ATO uses to establish your preservation age.

If you were born before July 1, 1960, the minimum age for preservation would be 55. If you were born after July 1, 1964, the minimum age for preservation would gradually increase to 60.

Purchasing A Home With A Self-Managed Super Fund (SMSF)

The rules of a self-managed super fund (SMSF) allow Australians to utilise their superannuation funds to buy an investment property, but they cannot use those funds to buy a home for themselves.

Using the Self-Managed Superannuation Fund (SMSF), a fund that can have anywhere from one to four members, one can buy the property. The members come to their own conclusions about how their retirement funds should be invested, and then they vote on those decisions collectively.

This might still mean investing in stocks, but given the phenomenal appreciation that real estate has shown over the course of the last decade or so, many people are opting to include house purchases as part of their investment strategy and retirement planning instead.

The process of establishing a self-managed super fund (SMSF) is highly regulated; thus, it is a good idea to seek the guidance of a professional financial advisor in order to comprehend the duties and effectively establish the fund.

Delving into the complexities of property transactions? A trusted property advisor can offer clarity and guidance, ensuring your decisions align with your financial objectives

Make A Deposit Using SMSF

An expert in the field named Michael Yardney, who is also the chief executive officer of Metropole Property Strategists, recently gave a presentation in which he detailed how individuals could use their retirement savings held in a self-managed super fund (SMSF) as a deposit in order to obtain a loan for the purchase of an investment property.

"If you had a balance of $300,000 in your superannuation, you could hold $300,000 worth of BHP shares or managed funds, or you might use $200,000 of that money as a deposit and borrow another $400,000 to purchase an apartment that was $600,000 in total price. Therefore, you are able to take advantage of leverage and gearing," he explained.

However, there are many limitations placed on the ability to borrow through an SMSF. To begin, it is not possible to purchase an investment property using the entirety of one's superannuation amount.

"You have to keep some back as a buffer in case you need it. Because banks are now more cautious, you should expect to receive a loan with a lower loan-to-value ratio from them "Mr Yardney added.

Banks are only willing to lend up to 70 percent of the value of a property, and they won't allow lenders' mortgage insurance to raise that limit any higher. However, keep in mind that the purchase of a property comes with a variety of expenses that are not immediately obvious. A "liquidity buffer" consisting of things like cash and shares and having a value equal to ten percent of the planned investment's total value must also be maintained by self-managed superannuation funds (SMSFs). When purchasing real estate with borrowed funds, it is common practise to use a Limited Recourse Borrowing Arrangement (LRBA), which gives the SMSF trustees the right to the beneficial interest in the asset that was purchased using the borrowed funds. At the same time, the ownership rights are protected by a trust arrangement.

Arm's-Length Rules And SMSF Property

Any investment that is made through an SMSF, such as purchasing property, is required to be done so on a "arm's length" basis.

This means that SMSFs are not permitted to buy assets from fund members or other related persons, nor are they permitted to lend money to these individuals; however, there are several exceptions to this regulation. There are, however, a number of other regulations to follow.

The concept of "related parties" is one that frequently causes confusion for SMSF trustees. This is due to the fact that a related party does not simply refer to a relative or another member of an SMSF. Additionally, it consists of:

• relations of each individual in the group
• the commercial associates that each member has
• anyone who is married to or has children with such business partners
• any business that is controlled or influenced by a member of the organisation or their associates
• any trust that is controlled by the member or the member's allies.

It is also essential to keep in mind that employers that make contributions to a member's superannuation are also deemed to be connected parties.

Purchasing a home through the First Home Super Saver (FHSS) programme

The FHSS scheme gives individuals who are interested in purchasing their first home the opportunity to save money for a down payment within their existing superannuation account.

Because of the favourable tax treatment of superannuation, the FHSS programme encourages Australians to accelerate their savings for a down payment on a home rather than using their current super to purchase a home, which is something that may be done through an SMSF.

Participants in the programme are eligible to make both voluntary concessional (i.e., contributions made before taxes) and non-concessional (i.e., contributions made after taxes) contributions to their super fund, allowing them to save up to $15,000 per year towards their first house.

After that, they can make a request to have those contributions and any earnings linked with them released in exchange for a deposit. The maximum amount of money that may be taken out of donations is now set at $30,000; however, from July 1, 2022, that limit will be raised to $50,000. Currently, the maximum amount of money that can be taken out of contributions is set at $30,000; however,

1. How Does The FHSS Program Operate?

The First Home Saver Scheme (FHSS) is a government programme that aims to assist individuals who are saving for their first home by encouraging them to make additional contributions to their retirement savings accounts (superannuation), rather than placing those contributions in a separate savings account, so that they can take advantage of the favourable tax treatment that is afforded to superannuation.

The first $25,000 that are deposited into the account each year are taxed at a rate of just 15% rather than the typical marginal rate, which is 35%. This level takes into account both the required contributions that an employer must make as well as any voluntary contributions that the company may make.

Beginning on July 1 of the following year, a first-time buyer will be able to contribute up to $15,000 annually, for a total of up to $50,000, under the FHSS programme. The limit was previously set at $30,000, but it was raised in the most recent budget proposal submitted to the federal government.

The first-time buyer can then use the monies that were contributed to the programme in order to assist them in paying for their first property. The more favourable tax treatment also makes it easier for purchasers to save up for a down payment in a shorter amount of time.

First-time buyers must either already reside in the property they are purchasing or have the intention of doing so "as soon as practicable." Additionally, first-time buyers must have the intention of living in the property for at least six months within the first year of ownership after it is practical to move in. Only then will they be eligible for the first-time buyer tax credit.

Because eligibility is determined on an individual basis, spouses, siblings, and friends can each access their own eligible FHSS contributions to purchase the same home even if they meet the eligibility requirements individually.

First-time buyers who want to start saving for a house can do so by enrolling in the First-Time Homebuyer Savings Scheme (FHSS), which allows them to engage into a salary-sacrifice arrangement with their employer or make contributions to their personal

When first-time home buyers are ready to release the FHSS amounts associated with their purchase, they are required to submit an application to the ATO for both an FHSS determination and a release.

2. What Are The Positive Aspects Of Participating In The FHSS Scheme?

The FHSS plan comes with a number of advantageous side effects.

• Because it allows consumers to save the difference in tax rate between their marginal tax rate and the rate of 15% that is levied on super contributions, it can improve the savings of first-time homebuyers.
• It is possible to reduce taxable income by engaging in salary sacrifice and making concessional payments.
• A decline in market conditions has no impact on the strategy.
• The advantage accrues twice as much to a couple.

However, there is a disadvantage to this. When more cash is contributed to the plan, that cash is "locked up" in the deposit and cannot be used for any other purpose during that time period.

The Good and The Bad

There are both positive and negative aspects to using your retirement savings as a down payment on a home.

1. Pros

• It is possible to get a significant edge by entering the real estate market at an earlier stage when house prices climb significantly faster than salaries.
• During your working life, you should pay off all or the majority of the mortgage on your property. If you put off purchasing a home for a longer period of time, you can enter retirement saddled with a significant amount of unpaid mortgage debt.
• Avoid Lenders Mortgage Insurance (LMI). If you increase the amount of your deposit, you may not only be able to avoid having to pay LMI, but you may also be able to get a higher interest rate on the loan you take out.

2. Cons

• Retiring can be less financially comfortable than working. If you take money out of your retirement savings account before you retire, you run the risk of having significantly less money available to you in retirement than you would have had you allowed the funds to remain invested.
• Risk of declining asset value. On the other hand, the majority of assets stored in superannuation accounts experience significant growth as a result of compounded earnings. This is in contrast to the chance that the value of your property would either remain same or, worse, decrease.
• It is possible that you will not be approved for a loan. For instance, taking money out of your superannuation fund in order to pay for a housing deposit does not ensure that you will be approved for a home loan. Before deciding whether or not to lend you the money, your lender will evaluate a number of variables, including your credit score and whether or not you have a history of saving money.

FAQs

1. What types of investments are prohibited for my self-managed super fund?

In most cases, your SMSF is not allowed to do the following:

• Lend money to you, any of your relatives, or any of the entities to which you are connected.
• Purchase of your assets, unless they are shares traded on a stock exchange or commercial property (but not residential property).
• Borrow money unless very certain guidelines are fulfilled.
• Invest in what are known as "in house assets."

2. Is it Possible to Withdraw My Whole Super to Buy A House?

This is something that is dependant on your situation. For instance, if you have turned 65 years old or have achieved the preservation age and have retired, you are eligible to collect your super as a lump sum payment.

The trustees of an SMSF have the option of investing the entire fund in a rental property rather than withdrawing it; however, they will need to provide a justification for this decision within the fund's investment strategy.

The answer is "no" for all other individuals. Through the FHSSS, you are only allowed to withdraw up to $30,000 of the voluntary contributions you have made. (Up to a maximum of $50,000 beginning on July 1, 2022)

3. How much superannuation do I need to use an SMSF to purchase an investment property?

The trustees of an SMSF are required by the laws that govern such funds to develop an investment strategy. This would generally mean having a diverse range of investments rather than putting the entire fund in a single asset, such as a property, as an alternative to investing the entire fund in a single asset.

There is no ironclad regulation that states the entirety of the fund's assets cannot be invested in a single piece of real estate. The point of diversification is to disperse risk, but there is no such thing as an absolute prohibition.

If you don't have enough money in your fund to buy a house outright, you might be able to borrow the remaining amount through a Limited Recourse Borrowing Arrangement. This will allow you to avoid the risk of losing all of the money in your fund (LRBA). This is governed by very stringent regulations, and the majority of lenders will demand the fund to hold a balance of at least $200,000 at all times.

4. How much tax will be collected from my self-managed super fund?

The 15% tax rate applies to the earnings of all types of super funds, including SMSFs. This tax rate is inclusive of any concessional contributions that are made to the fund. In addition, the rate of taxation on capital gains on assets that have been held for less than 12 months is 15%, whereas the rate is 10% for assets that have been kept for more than 12 months.

When your fund is in the retirement phase, also known as when it is paying you a pension, any income or capital gains from assets held in your fund to pay the pension will not be subject to taxation, and any franking credits that were received will be refunded in their entirety. Additionally, any franking credits that were received will be refunded in full.

5. Can I receive lump sum payments from my self-managed super fund?

Yes, as long as you fulfil a requirement for the payment to be made to you before it is considered complete.

6. Can I receive pension benefits from my self-managed super fund?

Yes, so long as the fund trust deed allows for such a provision to be made. The transition from the accumulation period to the retirement phase is simple and straightforward. When this happens, you won't have to pay any capital gains tax on assets that you bought during the accumulation phase but then sold after you started receiving pension payments.

7. What exactly is an investment plan?

The law demands that your superannuation fund have an investing plan, but there is no specific format that must be followed. The strategy will be different for each fund, but in general, it will take into consideration:

• The make-up of the fund's holdings in the various investments
• Future additions to the fund are expected
• The potential loss on investments
• The fund's requirements for its cash flow
• Liquidity
• Age of members.

The fund's investment plan must be in writing and should be evaluated every year or whenever new investment opportunities arise that conflict with it.

8. Is it possible for my self-managed super fund to take out a loan?

Yes, through Limited Recourse Borrowing Arrangements.

9. What exactly is an LRBA, or a Limited Recourse Borrowing Arrangement?

The establishment of a bare trust is necessary in order to borrow money for an LRBA, which is the means by which your fund can undertake a borrowing to purchase assets that it otherwise could not afford, such as property. An LRBA is a means by which your fund can undertake a borrowing to purchase assets.

10. What exactly is meant by the 'Sole Purpose Test'?

It is a legal requirement that a retirement savings account (sometimes known as a "super fund") must be used exclusively for at least one of the following fundamental purposes:

• Members' pension benefits
• Benefits upon death for members or their estates
• Benefits for members upon retirement or the onset of disability
• If the super fund is found to have violated the sole purpose test, then the fund may become non-compliant, which may result in the fund losing its concessional tax status and the trustees perhaps being subject to penalties.

11. Which agency of the government oversees self-managed super funds?

The Australian Taxation Office is the body that is accountable for this matter.

12. The Supervisory Levy is defined as what exactly?

The Australian Taxation Office levies this $259 fee on each SMSF annually upon the lodging of the annual return in the first year; the total amount of the levy is $518.

13. Is it possible to close down my self-managed super fund?

Your Self-Managed Superannuation Fund (SMSF) can, in fact, be terminated if the members decide they no longer need it.

14. Is it possible for me to buy land with my super?

You certainly can, and you can do so by way of both the FHSSS and an SMSF; nevertheless, the activities that are permitted to you under each structure are distinct.

If you purchase land through the FHSSS, you will be required to construct a home on the site and then occupy that home as your primary residence. But if you invest through a self-managed super fund (SMSF), you can put your money into almost any kind of real estate, including land, as long as it fits the fund's investment objective.

15. Is buying property with super worth it?

Making a down payment on a house with money from your retirement fund can be a profitable investment.

But as is the case with other choices pertaining to money, it will be contingent on your situation and need for careful consideration.

The most important question you should ask yourself is whether or not you believe the potential short-term benefit of withdrawing money from your retirement account will justify the potential high cost of doing so in the long run.

16. How much can I borrow through an SMSF?

Your current financial standing, as well as the lending practises of the lender you choose for your SMSF loan, will determine the maximum amount of money you are eligible to borrow. There are certain speciality lenders that provide loans to SMSFs beginning at $100,000 and increasing up to $4,000,000.

After the sale of the home, it's possible that your SMSF will need you to keep a certain minimum amount there. This number will change based on the specifics of your situation.

It's possible that certain SMSF lenders will insist that you maintain a particular amount of liquid cash in your account. If the initial deposit, however, is substantial enough or if the rental income is sufficient to support the loan repayments, your lender may agree to waive this requirement. This, however, is contingent on the lender that you choose.

17. What conditions apply to SMSF loans?

Most SMSF loans must meet four major criteria:

• The asset can serve only one of two purposes: either it must provide retirement benefits or it must provide death benefits to SMSF beneficiaries.
• If it is a residential property, the SMSF is prohibited from purchasing it from any member of the SMSF or any related party of a member.
• In the case that the property is residential, a member of the SMSF or any related party of a member is not permitted to reside in or rent out the property.
• It is not acceptable for the property to be a single acquirable asset.

When you buy a commercial property, the seller or landlord could be a member of a self-managed super fund (SMSF). This must be done at an amount equal to its value on the market, and the property may only be used for commercial activities.

Consult with a Qualified Expert

Before establishing a self-managed superannuation fund (SMSF), individuals should, just as they should before making any other significant financial decision, seek the guidance of a registered financial planner in order to gain an understanding of how their fund will function and how they will be able to access and use their superannuation.