If you’re already a homeowner, the rising value of property in most parts of Australia is likely to be something you’re celebrating. But for many would-be buyers, renters and parents, rising costs and lower affordability are a source of enormous frustration.
As the debate and the search for the solutions to housing affordability continue, the Federal Government’s 2017 budget has brought some hope for first home buyers with a proposal to introduce the First Home Super Saver Scheme.
While not yet legislated at the time of publication of this article, the First Home Super Saver Scheme has been designed especially to help Australians save for their first home purchase. While there was early speculation that the scheme would allow home buyers to draw directly on their super balances, this is not the case.
The proposed scheme uses the structure of super funds to allow members to make additional contributions – for the specific purpose of saving a home deposit – and receive the same preferential tax benefit on those contributions as you do with super. You’ll find further details about how it works below.
Why is the proposed scheme needed?
Figures from the Real Estate Institute of Australia presented to the Australian Treasury in a Pre-budget submission confirm that the challenges for first time buyers in today’s market are very real.
Rising values and the deposit gap
Since April 2012 when official interest rates were 4.25%p.a., the overall number of home loans issued in Australia grew by 25 per cent. Over the same time – and despite ten official rate cuts in that period – the number of loans for first home buyers decreased by 17 per cent.
While historically low interest rates may make actual mortgage payments more achievable for first home buyers, the REIA identify the deposit gap and stamp duties as the insurmountable hurdles.
National home ownership in decline
According to ABS data for November 2016, the proportion of first home buyers within the owner-occupied market was just 13.8 percent, compared to a longer term average of 18.5 per cent. After four decades of stable national home ownership levels, overall ownership levels are in decline in all states and territories with home ownership falling by 1.1 percentage points to 67 percent over the five years to 2011.
So how will the proposed First Home Super Saver Scheme Work?
If the proposed scheme is passed by Parliament, you can take advantage of the Super Saver Scheme from 1 July 2017 and withdrawals will be allowed from 1 July 2018.
As long as you qualify as a first home buyer, you can make voluntary contributions of up to $15,000 per year for the specific purpose of saving for a deposit. You can contribute up to $30,000 in total.
Your ingoing, additional super contributions will be taxed at just 15%, offering a worthwhile benefit on what’s likely to be your usual effective tax rate, which can range from 32.5% for lower income earners ($37,001–$87,000) up to 45% for high incomes (over $180,000), with average wage earners paying around 37%. These figures are a guide only and don’t include the Medicare Levy and the Temporary Budget Repair Levy for high income earners. Down the track when you withdraw your contributions as your deposit (or part of your deposit), you will be taxed at marginal tax rates less 30%.
Even with the applicable taxes, the Government estimates that “the concessional tax treatment and the higher rate of earnings often realised within superannuation” will typically boost deposit savings by around 30%.
Some important points to note
• Under the scheme you will only be able to withdraw contributions nominated as part of the scheme and any ‘deemed earnings’ on those contributions.
• Existing overall caps of $25,000 on voluntary contributions still apply. So if you are already making voluntary contributions to your super, now you can contribute up to $15,000 for your deposit savings and only up to $10,000 for your long-term super savings.
• If you are saving as a couple and as long as you both qualify as first home buyers, keep in mind that your combined overall contributions will be $30,000 per year up to a maximum of $60,000.
• If you are a salaried employee, you could arrange with your employer to make your contributions as ‘salary sacrifice’ to start getting the benefit of preferential tax treatment upfront.
Will it be enough?
Every little bit helps, but even $30,000 in contributions (or $60,000 for couples) may not be enough to cover all of your deposit. So you may need to look at how you can build extra savings outside the scheme. Especially if you’re looking to buy in capital cities where property values are high. Remember that a 20% deposit is worth aiming for to avoid expensive lenders mortgage insurance in many markets.
Have other countries had success with similar schemes?
Australia is not the only country where first home buyers are challenged by the market. Canada, New Zealand and Singapore all have schemes that help first home buyers use retirement savings.
Since 1992, the Canadian Home Buyer’s Plan lets people withdraw up to $25,000 from retirement savings to buy or build their first home. The withdrawn funds are repaid over 15 years to ensure buyers are still saving for their retirement.
In New Zealand, KiwiSaver is a voluntary, work-based retirement saving initiative which offers two features to help many New Zealanders into the property market. The KiwiSaver First Home Withdrawal Scheme allows members to withdraw some or all of their savings to use as a deposit or funding for a home or land purchase. The KiwiSaver First Home Subsidy scheme offers a government subsidy of up to $5,000, depending on the number of years members have been making contributions to Kiwi Saver. Members can take advantage of both features.
Since the 1960s, Singapore has operated a Central Provident Fund (CPF). With this social security fund, a portion of an employee’s salary is set aside for retirement, healthcare, and housing. Integrated with a number of CFP housing schemes, Singaporeans can use this savings for full or partial payment of property, along with ongoing payments. In 2013, the home ownership rate in Singapore was 90.5% with over 70% of homeowners servicing their housing loans solely with CPF savings.
What will success look like?
Only time will tell if the First Home Super Saver Scheme will be as successful for Australia as initiatives in other countries have been. Other measures proposed in the Federal budget include allowing people over 65 to contribute up to $300,000 from the sale of the family home into their super fund and receive the associated tax concessions. Theoretically, this is designed to encourage people to sell and downsize, increasing the number of properties on the market.
The budget has also proposed a 50% cap on foreign ownership in new developments and annual fees for foreign investors if purchased properties aren’t made available for rent for at least 6 months each year.
State initiatives are happening too
In addition to Federal measures, State governments are also looking at ways to help first home buyers into the market. In NSW, from 1 July 2017 first home buyers of existing and new properties costing up to $650,000 will be exempt from paying stamp duty and will receive stamp duty discounts under reforms announced recently by the Premier. Stamp duty on lenders’ mortgage insurance will also be abolished.
Your first home
While it’s no easy path to home ownership for first home buyers, the proposed First Home Super Saver Scheme and other initiatives should bring some relief – and hope – to would-be homeowners.
Your local Aussie broker is keeping a close watch on what is available to help you achieve your dreams. They’ll be happy to talk about how you how to turn that dream into a reality. Make an appointment today.