Before the recent federal election, both the Coalition and Labor vowed to support a new scheme helping first home buyers.
The First Home Loan Deposit Scheme (FHLDS) is yet to become law and is different to the First Home Super Saver Scheme (FHSSS). However, both schemes will work in conjunction and if you are looking to buy your first home, it is worth understanding how the two schemes can work for you.
Here are four possible strategies to consider:
- Under the First Home Super Saver Scheme a parent could put $15,000 per annum into a child (and their spouse’s) super, say for two years.
- Instead of saving money via going the bank, an individual could save money via the FHSSS through a combination of either salary sacrificed and non-concessional (essentially after tax) super payments.
- When the new First Home Loan Deposit Scheme comes into play on January 1, 2020, and if you are not earning too much, then you may only need as little as a 5% deposit. The average home price in Adelaide is $455,000, so that would be only $22,750. A big win.
- If you or your spouse is earning a lot of money, you may be better off making your first home an investment property (possibly after living in it for six months to qualify for the existing FHSSS and perhaps your state’s stamp duty concessions). This would make the loan interest and outgoings a tax deduction. Talk to your tax accountant first.
Here’s what you need to know about the FHSSS and FHLDS.
First Home Super Saver Scheme
From July 1, 2018, the scheme is as follows:
From July 1, 2017, if you make voluntary concessional (for example salary sacrifice or self-employed contributions) to super, and voluntary non-concessional contributions to super, these can then be used to fund your first home deposit. Note that this does not include your Superannuation Guarantee payment (for most people 9.5% of your salary) that your employer must contribute to super.
From July 1, 2018, you can use those voluntary contributions, along with the associated earnings, to help you purchase your first home.
Who is eligible to do this?
- You must never have owned property in Australia. This includes vacant land, company title, leasehold property, investment property and commercial property;
- You have not previously asked the ATO to issue an FHSSS authority – in other words, you can only access the scheme once.
- The home you buy you must intend to live in for at least six months within the first 12 months you own it.
One good thing is the rules apply only to individuals. So for example if you are a couple, and one of you has previously bought a property, the other one can still take advantage of the scheme.
You can apply for a maximum of $15,000 plus associated earnings for one financial year and for a maximum of $30,000 plus associated earnings across all years.
Other key points:
- The home must be in Australia
- You can sign your contract to purchase or construct your home from the date you make a valid request to release your FHSSS amounts.
- You can sign your contract to purchase or construct your home before making a valid request to release your FHSSS amounts. However, you need to have an FHSSS determination before you sign and you must make a valid release request within 14 days of entering that contract.
- You can only apply for release of your FHSSS amounts once.
- After you have requested the release, it may take between 15 and 25 business days for you to receive your money.
- You then have a 12 month window (from the date you made a valid request to release the FHSSS funds) in which you have to sign a contract for the purchase or construction of your new home. If you don’t do that, you will need to recontribute the amount (less any tax withheld) back into super.
- If you don’t do this, you will be subject to a flat tax of 20% on the amounts released.
- You can also apply if you have previously owned Australian property, but come under the financial hardship provisions. Examples are divorce, bankruptcy, loss of employment, illness, natural disaster or being eligible for early access to super.
First Home Loan Deposit Scheme
This scheme is not yet law, but we know from the announcement that:
- It will start on January 1, 2020 – just six months away at time of writing
- The FHLDS will mean first home buyers will only need a 5% deposit (normally you need 20%) and so will not have to pay Lenders Mortgage Insurance (LMI) – this can be around $10,000 for many borrowers.
- The scheme is limited to individual borrowers earning $125,000 of couples earning $200,000 combined. This could give borrowers in states like South Australia and Tasmania and in regional areas a relative advantage as wages are generally lower than in Sydney and Melbourne.
As the scheme is not yet law there are several unknowns:
- Will the smaller lender take a second mortgage?
- Will the government securitise (package up and sell) the loans?
- The detail – for example will individual earnings be based on adjusted earnings or just one’s salary?
- If applicants only have 5% savings and 5% from the FHLDS they still may have to pay some Lenders Mortgage Insurance for the gap between the 10% and 20% that many lenders require.
This is general advice and may not be suitable for you. It is encouraged you talk to an adviser who understands debt and superannuation.