Investing your super into property is among the most plausible ways to build your wealth. Recent Superannuation Law changes enable you to borrow some money to buy property with Self-Managed Super Funds or SMSF as long as you meet the conditions.
These changes also allow you to borrow and buy different types of properties from residential to commercial and allow investors to utilize property as a means to build wealth and generate income. This article discusses in detail how you can purchase a home with Superannuation.
So keep reading...
Purchasing a home
Buying property is certainly a huge financial decision. There are a lot of issues that you should consider aside from the obvious ones such as saving a deposit, property maintenance, and budgeting for mortgage payments.
You should think about how you’d cover the mortgage payments as well as any associated costs if you cannot work anymore. There are a variety of insurance options your super fund offers, which can cover you in case of injury, illness, income loss, or death.
If an emergency took place and you couldn’t pay your mortgage, the bank can’t take you super money to recover the debt.
Your home isn’t a retirement plan
While your home may be one of your biggest assets, it shouldn’t be relied on to finance your retirement. For starters, the majority of retirement projections that show “income required” in order to live on upon retirement, assume that you entirely own your home. Moreover, your home does not count toward the Age Pension asset test to determine your eligibility.
While in several cases, downsizing your home into something less upon retirement could make some capital available, it isn’t wise to count on it. Another path a lot of folks think about is a “reverse mortgage” to finance their life after work. You should not take this decision lightly, but rather see it as a retirement plan.
Accessing superannuation for mortgage payments
People who experience monetary problems could access their superannuation early to help in meeting living expenses and mortgage payments. Accessing super at this stage is a detailed and thorough process and does not take place instantly.
The Department of Human Services or DHS has more info on the various criteria for accessing your super early. You can also contact your fund about the details.
Investing in property via superannuation (SMSF)
In general, you can’t withdraw money from your super just to purchase property. For individuals with an SMSF, there are specific rules and regulation that permit your SMSF money to be used to buy property; however, this is the fund investing and not you as a person. Essentially, you can’t use the money from super to purchase a house to dwell.
If you’re looking to buy property using superannuation but don’t have the funds to pay for the whole purchase price, know that SMSF contains enough funds at 20% - 35% of the buying price along with the acquisition costs. The range will depend on the kind of lender and property requirements).
SMSF can buy property from borrowed funds to buy such property. The property is utilized as a type of security for borrowing under the ‘limited recourse loan’.
Should there be a default, the lender will only obtain the property’s recourse and will not be able to claim other Self Managed Super Fund assets.
The property will then be held within the trust for SMSF as entitled towards its income. Your Self-Managed Super Fund does the loan repayments to pay the loan on the arranged time. Once the loan is repaid, legal ownership for the property will then be submitted towards the Self-managed Super Funds.
Benefits of Buying Property with SMSF
Some of the unique benefits of investing in property through SMSF include:
- Loan repayments can be tax deductible (as long as members do salary sacrificing)
- Members are spared with capital gains once they retire
- Capital gains and income after expenses over the disposal of the property is taxed at 15% maximum rate which is better compared with the 46.5% rate that regular investors usually pay.
- Assets within an SMSF are, under regular circumstances, protected against bankruptcy proceedings and recovery.
- SMSF assets are secured since the lender doesn’t have recourse towards your Self Managed Super Fund assets in case of a default. This makes buying a property a great way to minimize volatility and the total risk of your investment portfolio.
Superannuation laws are complex like sound advice and careful management which are very crucial. Investors are advised to get accounting and legal advice while considering property investments with their SMSF or superannuation to fun the property’s purchase.
Click here if you want to know more benefits of Superannuation.
When to Start Considering a Super Managed Super Fund Loan
You want to buy a property as a kind of investment but:
Rodie and Kefla, both 45 years of age and working full time within the marketing industry, want to buy an investment property at the price of $400,000. This investment strategy was set simply to create wealth during retirement.
The Financial Advisor suggests they set borrow and buy the purchase property through their accumulated superannuation and SMSF. Both Rodie and Kefla were not aware they can borrow and purchase property through their Superannuation.
They opted for the professional advice of an account especially on how to save tax and the right Self Managed Super Fund structure. It turned out that they can save $100,000 in tax by the age of 60.
They were excited to discover that purchasing the property with SMSF and the projected savings on tax would be $100,000 by the time they reach the age of 60.
Can I access my superannuation early to cut my mortgage?
Super is subject to specific access rules known as preservation. Meaning, you can’t just access your superannuation benefits until you leave the workforce at a specific age, or when you meet another release condition such as severe monetary hardship or permanent disability. In regular cases, before somebody retires, it isn’t possible to access super like one accesses a bank account. However, on retirement, your super benefits can be cashed out. But before retirement, super benefits can only be accessed in certain circumstances.
Note that if a person struggles to repay a mortgage, and the property is about to be foreclosed by the bank, then it is likely to access to benefits on “compassionate grounds.” The DHS administers the compassionate grounds process based on strict criteria.
How can you, as a fund member, access superannuation early mortgage payments? The DHS may allow the release of your superannuation for “mortgage assistance,” if the release will prevent a mortgage foreclosure on the individual’s principal area of residence. Before permitting for your fund to release the money, the DHS needs a written statement or declaration from the lender or mortgagee that:
Moreover, the written statement should include the amount that equals to three repayment months under the mortgage, as well as the amount 12 months of interest on a loan’s outstanding balance. If the DHS permits you to access your superannuation early on the grounds of compassion, the individual’s fund can release the amount specified, and in every 12-month period, this payment can’t go beyond an amount that is equal to the total of two amounts – three repayment months and 12 months of interest.
As stated by the previous DHS guidance, the bases for early release of benefits do not take in mortgage payments – where there is likelihood of future difficulty in paying, yet the payments aren’t behind for such payments, but the bank or lender hasn’t decided yet to sell the property for debt or a property owned by your dependents for an investment property. Moreover, DHS offers more info such as verifying your identity or registering for a Centrelink account online before they consider this early access application.
Note that if you are thinking about applying for early super access, check that the rules of your fund allow a member to take out money under these conditions.
Here is how super is already funding homes
The federal government is not unanimous on whether first-home buyers should be permitted to use a portion of their super for deposits. However, what these critics miss is that the super system of Australia already channels a huge portion of retirement savings into housing.
Also, it does this not through the conventional route of folks buying a house, but instead via an indirect way, by converting the compulsorily acquired super equity of the household into mortgages from banks and other monetary intermediaries.
ABS statistics conducted in December 2016 confirm that for every $1 of assets handled by the super sector, around 27c is financing the banking sector of Australia. This is through super holdings of bank deposits, bank equity, as well as other liabilities.
So what do they do with this 27c? ABS states that 38% of financial assets of banks are long-term loans to homes. We also found that almost all of these loans are in fact mortgages, which suggests that 10c of every dollar of super asset is financing home purchase indirectly through the commercial bank debt.
However, this excludes other indirect bank finances by super. For instance, the portfolios of private non-monetary corporations as well as non-cash market mutual funds are mainly weighed towards financing banks (36% and 24% of their assets, respectively), and super funds allocate 24% and 6% to these respectively. Potentially, this adds 4c in every $1 of super assets that eventually causes debt financing of the housing.
Why using superannuation for housing might be a great idea
One advantage of permitting households to use super to pay their housing deposits would be to cut needless and costless financial intermediaries. Under the current system, the super money that travels into housing finance does so via passing through chains of numerous intermediaries. Meaning, it incurs admin or management expenses at every step.
In the chain, the first link is the super sector. Second are a couple of financial intermediaries such as banks. And the total expenses via the intermediation chain may be around 1.7% to 3%. And these costs may be much reduced under the housing equity super access schemes.
Another likely benefit relates to the debt accumulation and its consequences of monetary stability.
Since its compulsory, the most of the money folks save into super would’ve otherwise been utilized for other forms of saving. If you take a look at the assets on the balance sheet of the household, it’s clear that housing equity is the preferred savings vehicle of the household.
It is likely that the growth in compulsory super has a contribution to the increase in household debt in the following ways:
The plan’s risks
One concern about allowing people to divert cash into purchasing a home is that their retirement income could suffer consequently. To lessen the risk of these occurring, policies would have to record and monitor the fund’s values on home equity stakes.
However, total net assets determine, not super assets alone, determines the retirem
ent income. Essentially, home ownership offers retirees a crucial stream of stable tax-exempt, inflation-protected, income. The Association of Super Funds of Australia recognizes this benchmarks as “comfortable” and “modest” retirement income.
These will assume that retirees completely own their home. Therefore the decrease in home ownership is a huge threat to the capability of the retirement income system of Australia.
The second risk here is that the policy could increase house prices more, cutting affordability, as well as exposing retirement savings to a collapse. In today’s house price world, this is a risk, which would have to be tracked. On the other hand, the policy’s two major merits – (1) improving financial stability via cutting gross debt and (2) cutting intermediation costs – are long-run benefits that ought to continue to hold further that our present point in the cycle of the house price.
Moreover, APRA already tracks risks linked with housing credit increase. It also has the willingness and tools to use them, in case the policy promotes unnecessary house price growth.
Australians Are Mortgage-Secured and Prepared For Retirement
Contrary to the popular belief that Australians are constantly worried about their future, here's news that may change your perspective on things.
Most Australians consider themselves as middle-class citizens - almost half live "paycheck to paycheck;" three-quarters claim their mortgage has an enormous effect on their lifestyle; almost 3 in 5 are worried about keeping their lifestyle in ten years' time, and 66% think they're unprepared for retirement.
Those are a few of the results from a three-part white paper, Australia Today. The survey of 2,000 Australians provides a new perspective on our attitudes and views towards the standard of living, financial security, and life expectations in retirement.
A Comfortable Lifestyle's Costs
Australia Today assessed how Australians saw themselves when it comes to lifestyle and social class. Most of those asked (66%) considered themselves as lower middle class or middle class. Only 27% pointed out they were working class.
Seven percent thought they sat above the middle. Remarkably, almost half (44%) of those over the income ladder ($200,000+ household incomes) thought they were middle class, whereas 23% put themselves lower down the ladder.
"Comfortable" Lifestyle Definition
Three-quarters of those asked agreed that a comfortable lifestyle implies having enough cash to do whatever and whenever they want.
However, almost half are spending their pay packet to afford it with 46% reporting to living "paycheck to paycheck." Perhaps shockingly, this includes 27% of homeowners earning between $150,000 and $199,000 and 22% of homeowners earning over $200,000.
If being "comfortable" implies having "whatever we want, whenever we want it," how much does it cost to maintain a lifestyle such as this?
At least $150,000 annually as said by 48% of participants. And being worth $1,000,000 does not make you wealthy in Australia anymore as stated by 59%.
Three-quarters (76%) reported their mortgage has an enormous effect on their lifestyle, whereas 83% said that today's cost of living is higher than that of ten years ago. Forty-four percent stated that the living cost where they live makes it hard for them to keep a standard of living.
Maintaining Lifestyle a Huge Concern
Australia Today research also reported that a lot of respondents stated feeling rather despondent about their prospects.
Close to 3 out of 5 (56%) expressed concerns about maintaining their lifestyle in ten years' time. One out of five (17%) pointed out that they'll count on family inheritance to settle their mortgage or to guarantee their financial security.
A third (35%) stated their concerns about job security. Almost 3 in 5 (56%) were worried about maintaining their lifestyle in ten years' time.
Those aged 50 years old to 70 (61%) – who are probably either approaching retirement or retired– were more likely to be concerned about keeping hold of their present lifestyle.
Are we on the route to self-funded superannuation? Will we have ample financial sources to see us through?
Moreover, Australia Today stated that 2 in 5 (43%) did not think they'd be able to support their lives after work, agreeing that they'd be counting on the government during retirement. People aged 50 to 70 years more likely agreed (49%), whereas those aged between 25 and 29 much less likely agreed (33%).
Of those presently retired, 53% are depending on the Australian government while 44% of those who are transitioning to retirement will depend on the government upon retirement.
Does Australia's present status give you more optimism? Feel free to share your thoughts on this present news in the comments.
Find out more information
You can find more information about Superannuation and tax in the article –
And for a complete SMSF Guide, refer to the article -
And for advice on how to use superannuation to buy property contact us today at:
Disclaimer: All information on this website is of a general nature only. We have not taken into account your financial situation, needs or objectives. You need to make up your own mind and ascertain yourself if it is right for you. We recommend you read the product disclosure statement(s) and the financial services guide before making any financial decision.