A financial tactic traditionally associated with the wealthy generation is gaining popularity among young Australians, and may be the secret to their huge success in the property market.
There is one often overlooked route to home ownership, traditionally thought of as a strategy reserved for wealthy baby boomers, that a growing number of young Australians are engaging in, but surprisingly few of us know the details of.
A recent poll by news.com.au showed that Pepper money More than 5,000 Australians were asked how aware they were of using their superannuation to buy property.
While the vast majority of Australians were at least aware of their super or had a retirement goal, only 5 per cent of respondents said they understood the financial and legal implications of using super to buy property.
Less than a quarter of respondents — just 22.3% — said they knew the basics but didn’t know the details of how to do it, while 32% said they had some understanding of the concept. Another 14% said they didn’t even realize it was possible.
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Although few Australians are aware of the option, Pepper Money CEO Mario Reheim says demand among those who do is growing.
“We are seeing strong demand from Australians investing in property using their superannuation balance to get onto the property ladder,” Mr Reheim told news.com.au.
“Australians have a passion for property and a desire to take control of their investments.
“People are looking for different ways to get on or up the property ladder.”
Use super to save money to buy a home
Currently, there are two main ways super is used to purchase property in Australia.
The first programme available to first-time homebuyers is the government’s First Home Loan Scheme (FHSS).
This program, established in 2017, allows Australians to make personal voluntary contributions to their superannuation funds to help them save for a home.
Preferential contributions are taxed at just 15%, which is usually less than your marginal income tax rate. Assessable FHSS amounts also benefit from a 30% FHSS tax credit, meaning your deposit can build up faster.
Under this scheme, you can withdraw up to $15,000 of your voluntary contributions from any one financial year, and a total of $50,000 over multiple years, plus earnings associated with the funds.
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Using a Self-Managed Retirement Fund (SMSF) to Invest in Real Estate
The second route from super to home ownership is self-managed super funds, where, with the help of an accountant and financial adviser, you create your own super fund that is managed and use the money to invest in the property market.
Mr Reheim said Australians’ desire to take control of their investments was driving the growth in self-managed superannuation funds (SMSFs).
“The value of assets managed through self-managed pension funds has already surpassed retail and public sector funds and is approaching industry funds,” he added.
Of the total $3.7 trillion in retirement assets, the latest APRA data shows SMSFs hold 24.7 per cent.
“But despite the growing popularity, it still amazes me that the vast majority of survey respondents (95 per cent) say they lack sufficient knowledge about using their pension to buy property,” said Mr Rahim.
“Around 15 per cent of survey respondents did not know that buying property with pensions was possible – which could be a missed opportunity for some.”
A financial tactic traditionally associated with the wealthy generation is gaining popularity among young Australians, and may be the secret to their huge success in the property market.
For Tony Harrington, a worker-turned-finance coach who built his empire while working and raising his three children alone, it’s an option worth investigating for a large number of Australians.
“I learned about self-managed retirement funds about five or six years ago,” says the real estate investment advisor, who has written three books aimed at helping blue-collar workers retire with their own money.
“A lot of people are starting to realize that they will reach retirement age and not have enough money to live on,” he says.
“The plan that most people follow, which is about 97% of the population, is: buy a house, have a couple of kids, get a 30-year mortgage, and hope you have enough money when you retire.”
But Mr. Harrington says that’s not the only strategy.
“With ownership, we can control the game, and we traditionally know what ownership will do,” he adds.
“For someone in their mid-50s in particular, buying an investment property through a self-managed retirement fund is starting to look like a good idea, because under current rules and regulations, when you sell the property, there is no capital gains tax. It’s not a bad strategy for many people who want to take their money out of the stock market (where there is a lot of volatility) and into property, and not have to pay any capital gains tax if they get a good purchase.”
Access to pensions is risky, and policies and proposals from both sides of government to allow access to pensions to buy property have been heavily criticised.
The biggest hurdle to this strategy, says Mr Harrington, is the heavy legal and administrative burden of setting up and operating a self-funded retirement fund, as well as the varying advice in the industry.
“In short, my view is that it is very complicated to do,” says Mr. Harrington.
“The setup process is very complex, which is why it is so important to have the right people on your team. You need a good financial planner, a good tax accountant and a mortgage broker who understands self-managed pension fund structures.”
The current cost of living crisis has prompted many Australians to put their dreams of owning a home on hold, with around one in four Australians surveyed (24.2 per cent) saying that another rise in interest rates would likely prompt them to postpone buying a home in the next 12 months.
But Mr Rahim says many of these frustrated property seekers may lack awareness of the options available to them.
“The future looks bright for self-managed superannuation funds as more Australians take control of their superannuation funds,” he said.
“While there is sometimes an outdated image of self-managed superannuation funds held by wealthy baby boomers, Australian Taxation Office data shows that it is becoming increasingly common for younger people to set up such funds these days.”
There are also options for borrowers who want to explore this option and who may be concerned about not having enough in their retirement savings with SMSF loans available, borrowing through an SMSF to invest in property is restricted by strict borrowing conditions.
