Anyone who is serious about squirrelling away for their first home should be paying close attention to the Federal Government’s proposed First Home Super Saver Scheme; it will save you money.
In a bid to help first home buyers accelerate their savings the Government will let you contribute some of your pre-tax income into your super account – where it will be taxed at just 15 per cent – and then take it out to help pay for a home loan deposit.
The most you can contribute under the scheme in any one year is $15,000 and $30,000 in total.
Mercer financial adviser George Mileski says if you’re definitely going to buy your first home and you’re already saving for a deposit, there’s a clear benefit to doing it.
If you use the scheme to put $10,000 of pre-tax income into super each year for three years, you’ll be able to withdraw $27,380. If you earn $60,000 a year you’ll pay tax of $1,620 when you withdraw the money, leaving you with $25,760 for a deposit. That works out to about $6,240 more than if you saved in a standard deposit account.
For a couple who each take advantage of the scheme, the benefit would be doubled to $12,480.
“The money you save won’t buy you a house – it won’t even cover your whole deposit if you’re buying in Melbourne or Sydney, but it is $12,480 you wouldn’t otherwise have,” Mileski says, “There’s no downside to that.”
However, if you’re only considering buying your first home, but you’re not sure; you might want to think carefully before jumping on board. Why? Because if you change your mind, you can’t get your additional contributions back until you reach retirement age.
Also, there are currently no details about how the scheme will operate for couples where one partner is a first home buyer and the other isn’t. If that’s you; hold tight and wait for more details.
Big picture benefits
Mileski says the scheme offers more than just an opportunity to accelerate your home deposit savings; it’s a chance to really get to grips with your finances.
Your home, he says, can be considered to be one of three key financial pillars. The other two are your superannuation and your ability to earn an income. “This scheme,” he says, “has the potential to bring all three of those things into sharp focus, particularly for younger Australians.”
“When people start taking an interest in their finances – and if you’re saving for a home deposit then you’re probably taking a very keen interest – they realise that every little bit counts,” Mileski says.
“This scheme also offers an opportunity to better engage with your super and see its potential as a long-term savings tool.”
Mileski says saving for a home is a huge ‘ah-ha!’ moment for most people; it’s not just the exercise of accumulating enough for a deposit, but the fact you’re about to take on a huge financial commitment.
“You need to ask yourself how you’re going to service the loan while maintaining your lifestyle and keeping site of your other long-term goals,” he says. “You suddenly realise that your income has to cover a lot – you need to know that your ongoing ability to earn an income is rock solid and well protected.”
A quirk in the interest
Another quirk to be aware of involves the way your home deposit contributions earn interest. They’re not paid into a separate account; they’re all lumped in together with your compulsory employer contributions and your other long-term saving. But they earn interest differently.
Your ‘normal’ super savings are at the mercy of the markets – how much your super returns depends on how you’ve chosen to invest it and how the assets you’re invested in perform.
But the money you’ll eventually have available to use for a deposit isn’t actually dependent on investment markets. Instead the Australian Tax Office (ATO) uses a formula to work out how much interest they will allow to be withdrawn when you take the money out; 3% plus “the current bank bill rate”. Right now that works out to a total of 4.78%.
So, if your super earns more than that, the extra returns will remain in your super account, which is not such a bad thing. Problem is if markets dive your super balance may return less than 4.78%, or even go backwards.
As far as the ATO is concerned your home deposit savings will still have grown by exactly 4.78%.The difference will come out of your ‘long-term’ super savings; and that’s not ideal.
There are limitations
The most you can contribute under the scheme in any one year is $15,000 and $30,000 in total. Home deposit contributions cannot include compulsory employer contributions and they count toward your total concessional contributions cap; $25,000 from 1 July 2017.
You can start making home deposit contributions from 1 July 2017 and withdrawals, which will be taxed at 30 per cent below the member’s marginal tax rate, will be allowed from 1 July 2018. Money withdrawn must be used to fund a first home deposit.
We’ll keep you posted on Home Saver Scheme news – keeping in mind that it is just a proposal at this point and still needs to get through both houses of Parliament before it comes into effect. In the meantime, call 1300 652 770 if you’re got any questions.