Twelve months ago I bought an apartment in Melbourne. I purchased it as a solo owner and occupant, but the COVID-19 pandemic had dropped home loan interest rates to 2.02% so I was relatively comfortable covering the monthly fixed-term repayments myself. Purchasing my first home was made possible (in part) by historically low interest rates rather than Government incentives.
Cut to 2022 and interest rates have increased 2.25% in five months. The last time rates rose this fast was in 1994 when the Reserve Bank of Australia hiked rates from 4.75 to 7.5%. As a result, breaking into the Australian property market has become incredibly difficult for first home buyers. Those looking to buy an off the plan home or commence a custom build project are now searching for alternative ways to make saving a 20% deposit possible. One such way is the superannuation first home buyer scheme called First Home Super Saver Scheme (FHSS). But what is this Government assistance program? And more importantly, is it worth it?
What Is The Superannuation First Home Buyer Scheme?
In early 2020 when the COVID-19 pandemic first started creating chaos with our economy, the Australian government responded with a number of assistance packages. Those who were doing it tough financially could withdraw money from their superannuation to help balance any economic losses. In Australia you can only access your superannuation when you turn 65, so new access to these funds generated an understandable amount of interest and had many people asking: “can you use your super funds as a home deposit?”. While that wasn’t possible under the 2020 program, there are others first home buyers can use their superannuation to buy a property- through the First Home Super Saver Scheme (FHSSS).
First introduced as part of the 2017-2018 Federal Budget, the goal was to make it easier for first home buyers to get their foot in the door of the property market. Under the FHSSS, eligible Australians could make additional contributions to their superannuation and then withdraw the accumulated funds to put towards a deposit.
Sounds simple, right? Well there are some eligibility criteria attached.
Who Is Eligible For FHSSS?
The First Home Buyer Super Saver Scheme comes with eligibility criteria and stipulations regarding how you purchase and reside in your first home. Here are the 5 key things you need to know:
- You must be aged 18 years or over
- You have never owned a home in Australia before
- The home you plan to buy must be for residential purposes
- The contract of sale must be signed within 12 months of funds being withdrawn.
- You must reside in the home for at least 6 months within the first 12 months of settlement.
How Does the FHSS Work?
According to the Australian Taxation Office (ATO), eligible first home buyers can contribute up to $15,000 to their superannuation fund each financial year under the First Home Buyers Super Saver Scheme. These funds can be direct deposits made from your personal bank account or before-tax salary sacrifice contributions you’ve asked your employer to deposit on your behalf.
The original amount that could be withdrawn and put towards a deposit was capped at $30,000, but in the 2021-2022 Federal Budget the Government announced that from July 1, 2022 the capped amount will increase to $50,000.
The FHSS allows you to make contributions to your super for as long as you like, but withdrawing the funds can only be done once.
Superannuation First Home Buyer: The Pros And Cons
The biggest challenge facing first time buyers is money – property in Australia is expensive and interest rates and the cost of living are high, so having an alternative way to save money for a deposit via FHSSS can help overcome those blockers. However, there are restrictions on how much you can save and when you can use the funds. Let me explain:
The Pros
- Dual Income Homes Can Double Their Deposit
The FHSS is available for all individuals in a household, so if you’re planning to buy a home with your partner, friend or family member, you can both be making contributions and both be reaping the benefits.
- Salary Sacrifice Tax Benefits
FHSSS contributions can be used as part of salary sacrifice agreements so the tax on your income is reduced.
- Withdraw Your Funds At Any Time
First home buyers can withdraw their savings at any time so the funds for your deposit will be available whenever you choose to make an offer on a property.
The Cons
- Contributions Are Capped Annually
If you’re in a financial situation where you have the scope to put a large portion of your income towards a deposit on a house, the $15,000 cap on FHSSS contributions could hold you back.
- Funds Can Only Be Withdrawn Once
This puts a lot of pressure on first home buyers to pick the right moment to withdraw their FHSS fund, so if you want more flexibility with your deposit, a traditional savings account with a bank may be the best option.
- Any Funds Withdrawn Will Be Taxed
Any funds withdrawn under the FHSSS are taxed at 30% by the ATO, but with a bank, only the interest amount you earn on your savings account is subject to tax.
Is the First Home Buyer Super Saver Scheme Worth It?
Last year while I was shopping for the best home loan I realised the secret to saving (and whether schemes like the FHSSS truly benefit you) is the interest rate.
Right now Australian banks charge an average of 2.06% interest and Australian super funds charge 5.08%. If you put $5,000 savings into a bank today and nothing further than this initial deposit, in 12 months your savings would grow to $5,130. Doesn’t sound like much of an increase? Here’s what happens after 10 years with compounded interest (assuming interest rates remain stable):
Year 1 – $5,130.00
Year 2 – $5,263.38
Year 3 – $5,400.23
Year 4 – $5,540.63
Year 5- $5,684.69
Year 6 – $5,832.49
Year 7 – $5,984.14
Year 8 – $6,139.72
Year 9 – $6,299.36
Year 10 – $6,463.14
After 10 years you’ll have $1,463.14 more to put towards a deposit than when you started without saving anything further.
But what if you were a superannuation first home buyer?
If you put $5,000 into a superfund under the First Home Buyer Super Saver Scheme, here’s what you will save over the same 10 years:
Year 1 – $5,290.00
Year 2 – $5,596.82
Year 3 – $5,921.44
Year 4 – $6,264.88
Year 5 – $6,628.24
Year 6 – $7,012.68
Year 7 – $7,419.42
Year 8 – $7,849.74
Year 9 – $8,305.03
Year 10 – $8,786.72
Even with the 30% tax upon withdrawal of funds, if interest rates remain stable, you will still accrue $3,786.72 more than when you started. This means that by planning for your future and using a super fund, you could save an additional $2,323.58 than when using a bank.
Is it worth it? I’d say yes.
See Also: Building Insurance for Strata Units