A superannuation account (super for short), was largely created to provide retirement income for workers during the years they’ve spent working, and to reduce the nation’s reliance on the age pension.

However, the actual use of superannuation and these retirement benefits has changed over the years.

Today, people have many people are choosing to use their retirement savings to invest in a wide range of types of assets. One particular question that often comes up is how to buy a house or an investment property, using these funds.

So, can you actually use your super account to buy property, and if so, how does it work, and what are some advantages and disadvantages to this option.

What is a Self Managed Super Fund?

A Self Managed Super Fund (SMSF) is a means of saving money that you plan on spending during your retirement years. It’s still superannuation, it’s just when you have all the control rather than having your savings through a large superannuation provider.

With an SMSF, you choose the investments, the strategy, the insurance, and all decisions of the fund. You’re in control.

Moreover, a Self Managed Super Fund can have up to six members. This has been an increased change from 2021, where previously the maximum had been four members and may work for larger families. An SMSF will usually have individual trustees, but many accountants and advisers may recommend a corporate trustee instead. Most funds have no more than two members, as they’re often a de facto or married couple’s fund.

As this is a private fund, you do get the benefit of having control and making your own decisions, but likewise, it involves a lot of work, time, and motivation to stay on top.

Setting Up The Fund

To set up the fund, you’ll need both time and guidance from a professional adviser or accountant.

Even if you rely on professional assistance and advice, it’s still a lengthy process. Besides the time that you will spend setting up the fund, you’ll need to set aside time for:

• Researching different investments
• Setting and following an investment strategy
• Accounting activities, keeping records
• Understanding your options around insurance if appropriate
• Arranging an audit every year (by an approved SMSF auditor)

Some estimates suggest that it can take up to eight hours a month to manage your self managed super fund successfully. Likewise, the set-up costs can be substantial, which is why the ATO recommends a significant opening balance before considering an SMSF.

As you may have guessed from the activities above, some of these costs include:

• Setting up the fund
• Investing
• Accounting
• Auditing
• Tax advice
• Legal advice
• Financial advice

Responsibilities and Risks:

The responsibilities of managing an SMSF fund come with certain risks:

• You are liable for all of the fund’s decisions.
• Your investment strategy and decisions may not result in high returns.
• You are responsible for managing the fund even if things change
• Relationship breakdowns (sickness, death)
• No access to any type of compensation scheme should you lose money by theft or fraud
• The potential loss of insurance benefits by moving from a retail or industry fund to SMSF (seek professional financial advice)

As you can see, there are a lot of factors to take under consideration before deciding on whether an SMSF is right for you, and advice from licensed professionals is a must.

Expanding further, if you’re looking to use your SMSF to purchase property, you also need knowledge of the real estate market on top!

SMSF Borrowing

This is where the situation can get a little (more) complicated.

The conditions that include SMSF borrowing are outlined in the “limited recourse borrowing arrangement (or LRBA). What’s important to highlight here is that each property/purchase can only be used when you are planning on buying a single asset, be it commercial or residential property when you’re looking to borrow money for a purchase. A separate asset called a bare trust is set up to own the property on behalf of the self-managed super fund. Ultimately, if you default or can’t pay the loan, the lender only has the right to go after the property asset itself, rather than the rest of the assets held in the SMSF. If you want to buy a second property, you’ll need another LRBA to be set up for each and every additional property that needs to be financed.

Some of the risks associated with SMSF borrowing are cash flow, holding enough money to successfully perform all operations, as well as that the rules around SMSF and superannuation change on a regular basis, so what may be worthwhile and appropriate today may not be in a few years’ time.

Also, you will not be able to make any substantial changes or improvements when using bank or lender funds. Whilst repairs and maintenance are acceptable, building out, extending, and largely improving the property is not allowed under an LRBA.

Can I buy my own home through an SMSF?

“Can I use my super to buy a house” is one of the first questions we often get asked when clients are interested in using their retirement savings towards property, and the answer is yes…and no.

You can use super to buy a house, but it can’t be the house you live in yourself (be that a home, holiday home etc). The type of property (apartment, house, townhouse, warehouse) is not the issue, it’s the purpose of the house itself that is relevant.

So, yes, you can buy a house, just not to personally live in.

What else should I know about Superannuation?

Even though the idea of calling on your super to buy an investment property may be appealing, unfortunately, this is not an option that is open to everyone given the costs and eligibility associated.

If you’re looking to physically withdraw funds from your super account and use them for buying a house, you need to be eligible, with one option being the First Home Super Saver Scheme.

Essentially, there are three groups of house buyers that are eligible, and they include:

First Home Buyers

First home buyers will most likely be granted access to their super account under certain conditions.

This is done through the Federal Government’s First Home Super Saver Scheme (FHSS).

Within this option, it is essential for the home buyers to bear in mind that they are only allowed to make use of their voluntary contributions, and NOT the compulsory contributions that are officially made by the employer.

First Home Super Saver Scheme: A Guide

The First Home Super Saver Scheme (FHSS) was first brought up by the Federal Government back in 2017. The point of this scheme was to lower the pressure tied to housing affordability.

Australians looking to save for their first home could make extra voluntary contributions into the super account. According to the Australian Taxation Office, this helps first-time house buyers to save money faster, as you’re reducing your taxable income, thus the higher the tax rate that you’re on, the more the benefits potentially can be.

Post the most recent budget, buyers are eligible for up to $50,000 as a maximum releasable amount, which has increased from $30,000.

You will need to request a release and have the ATO make a determination of your release. Lenders understand this process and can count the FHSS towards your own deposit and funds to complete.

How much money can you count on?

Broadly speaking, first home buyers can count on up to $30,000 of their voluntary contributions, which they can afterwards use to add to their home deposit. This is realized either through pre-tax contributions, or contributions made after-tax benefits.

Property Investors via SMSF

The next eligible group are property investors.

This implies being a part of the Self Managed Super Fund (SMSF). Fund members are allowed to utilise their superannuation towards property, investing in real estate.

An SMSF property loan is provided by lenders to help you leverage finances and invest in real estate. SMSF property loans are tailored to provide financial help to trustees, and since this is a complex process, it is recommended to seek legal independent advice as well as advice from your financial adviser before applying.

Retirees

The group for which superannuation is primarily intended are retirees, and they make up the next group of people who are eligible to use this money to buy property.

Ultimately, you don’t have to be retired. You will get full access once you reach your preservation age.

The “preservation age” is determined by the ATO, and it’s based on your birth year. The “preservation” refers to your super fund being a “preserved benefit”.

The minimum preservation age stands at 55 if you were born before July 1st, 1960.

Lump-Sum or Pension

Retirees can decide to take their superannuation out as a lump sum, or to take it as a pension payment each month, quarter, or year. It’s crucial to get advice on what is right for you.

Property Market Rules

There are also certain property-related requirements that should be met. They include that the property you want to invest in must be an investment property:

• Not be lived in by the fund member or related parties
• Not be rented by the fund member or related parties
• Not be acquired by the fund member’s related parties

Furthermore, if your super fund is used to purchase commercial property, only then can it be leased to a member for business purposes.

For more details on rules regarding your SMSF, refer to the Australian Taxation Office website.

The Sole Purpose Test

Your SMSF or superannuation will need to meet the sole purpose test to ensure it can receive the tax concessions under SIS legislation. The sole purpose test outlines that super is providing retirement benefits for its members.

I’ve been told I can salary sacrifice to my superannuation?

A superannuation salary sacrifice is a legal agreement between you and your employer, where he allows for a portion of your pre-tax salary to be transferred into your SMSF or super fund.

Seek professional advice before undertaking this.

Pros and Cons of Using Super in Buying Property

If you’re dwelling on using super as a way of breaking into the property market, here are some pros and cons that you should consider before making the final call. One pro and con of each

Pros:

Probably one of the biggest pros to using your super to buy residential or commercial property is that you will step into the property market via a different channel. This may mean for some people get into the market earlier, and this is especially useful when it comes to the constant fluctuations and rising house prices.

Cons:

Finally, being a member of the fund and withdrawing money from your account does not necessarily mean that you will qualify for a loan. The credit provider will first have to take into account multiple factors before loaning you the finances.

So can I use my super to buy a House?

It’s not impossible, it just won’t be your own home if your superannuation itself is going to hold the property asset. If you’re looking to buy your own home, you have some other alternatives:

Get a Guarantor

The first option would be to try buying a property through a guarantor loan. If your family has a property they’re willing to use as security, that may help you get into your first home sooner. However, a guarantor must have:

• Equity in their current property;
• Understand their rights and obligations as a guarantor;
• Preferably, use an investment property rather than their own home

Buy With A Partner

You can always choose to buy a house with your partner or family member.

Ensure that both of you share the same view on this. You’ll have to go through an ownership contract, and have a planned exit strategy in case things get complicated.

Grow Your Deposit

It’s also possible that you just need a bit more time to grow your savings. Manage your budget, and speak to your mortgage broker about your options in savings so that you can buy a house quicker.

The FHSS scheme

As discussed above, this can be a great option if it suits your circumstances and can allow you to be a home buyer sooner.

Lenders Mortgage Insurance

LMI is there for a reason. It provides purchasers with a way of getting into the market sooner than they otherwise could, in exchange for payment of an insurance premium that protects the bank’s position. Whilst it can be costly, it can also shave years off the purchase date for that first home.

Final Thoughts

So… yes, you can use your super in order to buy a house. However, there are a couple of factors you need to take into consideration before you agree on this.

In years gone by, self-managed super funds were primarily used as a retirement strategy for those people that wanted more control over the investment strategy of their retirement funds. However, today’s purpose of these funds includes property investment as a potential asset class.

As of July 1, 2022, the FHSS scheme will allow a withdrawal of up to $50,000 for eligible applicants.

If you’re looking to buy a property through super, it must be an investment property, and likely through an SMSF.

If you need a loan for your property purchase, a bare trust will need to be set up, and a limited recourse borrowing arrangement (LRBA) would need to be in force.

Super is there for your retirement savings, so any investment strategy and purchase should be sure to meet the sole purpose test.

Always get professional accounting and tax advice to ensure you’re doing what’s right for you.

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