First Home Super Saver Scheme: Using superannuation to buy your first home

Today’s Say What Wednesday question comes from Emma, and relates to saving for a house deposit:

“Hi, thanks so much for the podcasts – I have learnt so much. My question is about saving for a house deposit in Sydney. We have $130,000 saved (which has taken us about five years to save) however we met with a broker and she recommended avoiding LMI by saving up the full 20% of the purchase price plus 4.50% for stamp duty etc. As we have two children we’d like to buy a modest townhouse which are currently valued at around $850,000.

Basically, at our current renting while saving rate this would take us five years or so. Do you recommend using ETFs, LICs in this saving circumstance or using the first home super saver scheme or term deposits etc? I’d love to hear any ideas you have to help us save, stay motivated and finally buy something!”

Thanks Emma!

Here’s what we think…

Option 1 – Staying away from risky investments – (5-year period)

1. Given that you want to purchase a place in 5 years, I would probably recommend staying clear of ETFs and LICs.
2. The share markets have had a good run over the past 8 years and historically speaking, we are more likely than not to have some correction in prices within 5 years.

Option 2 – Interest accounts

1. Keep doing what you are doing – Savings in personal names
   • Downside at the moment – Low interest rates and income taxed

Option 3 – Super (First home super saver scheme)

1. Using superannuation is a viable strategy in most situations, even though it can be a little restrictive.
2. It essentially allows for larger savings through the reduction in total tax paid on the level of savings (through not receiving it as a taxable income).

How it works:

• From 1 July 2017, individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total, to their superannuation account to purchase a first home.
  • Pre-tax contributions. – Taxed at 15%, along with deemed earnings, can be withdrawn for a deposit.
  • Done through employer – Salary sacrifice
  • Self-employed – Can still make the contributions, and claim a deduction on personal contributions later
  • Must remain within concessional (pre-tax) cap of $25,000
• Withdrawals will be taxed at marginal tax rates less a 30% offset and allowed from 1 July 2018.
  • Amount of withdrawal = Net contribution plus deemed return (90-day bank bill plus 3%)
    • 4.50% currently – will change as the RBA cash rate changes
  • Withdrawal administered by the ATO – determine the amount of contributions that can be released and instruct superannuation funds to make these payments accordingly.

Examples

1. Individual earning – $60,000 a year – Never bought a home before
2. They direct $10,000 of pre-tax income into superannuation
   • increasing her balance by $8,500 (after 15% tax)
3. Continue for 3 years – Contribute up to $30k in total
4. Withdraw $27,380
   • Net contributions of $25,500
   • Plus deemed earnings on those contributions (4.5%).
5. Withdrawal tax of MTR (34.5% including Medicare levy) minus 30% offset
   • $1,620 in tax paid
6. Net withdrawal – $25,760
   • $6,240 more than if saved personally ($12,480 more if you are a couple)

Thanks again for the question Emma

P.S. Awesome work on being able to get to $130,000 in savings!