A simple guide to using super to buy property

Dipping into your superannuation nest egg to buy a property is an investment strategy becoming more prevalent amongst generations of Australians today. Here we’ll look at how to utilise superannuation to purchase an investment property.

Methods to utilising super

Generally speaking, Australians can tap into their superannuation to purchase a property if they have a self-managed super fund (SMSF) or are looking to take advantage of the federal government’s First Home Super Saver (FHSS) scheme - more on that a bit later.

SMSF

SMSFs can have up to six members, with all members making their own collective decisions about how their superannuation is invested. Under the rules of an SMSF, Australians can use their superannuation to buy an investment property, but not one they plan to live in.

Setting up a SMSF is a highly regulated process, and it’s smart to get professional financial advice to understand the responsibilities and set up the fund correctly. Some guidelines outlined by the Australian Taxation Office highlight if purchasing a property as an investment with an SMSF, the property must:

• Meet the 'sole purpose test' of solely providing retirement benefits to fund members.
• Not be acquired from a related party of a member.
• Not be lived in by a fund member or any fund members' related parties.
• Not be rented by a fund member or any fund members' related parties.

Further to this, you cannot put an existing residential investment property into an SMSF – either by way of the fund purchasing it at market value, or contributing to it within the cap limits.

Borrowing to purchase a residential property through SMSF

Utilising a loan to purchase a property through an SMSF is a completely different ball game to purchasing property outright with your SMSF, therefore it is important to avoid confusion between the two.

Typically speaking SMSF lenders will lend up to 80% of the house value without offering lenders mortgage insurance (LMI) for those looking to purchase a property with an SMSF loan. SMSFs are also required to keep a liquidity buffer of assets such as cash and shares worth approximately 10% of the proposed investment’s value in the self-managed fund.

Borrowing money to buy property is often done through a Limited Recourse Borrowing Arrangement (LRBA), which involves the SMSF trustees receiving the beneficial interest in the purchased asset, while the legal ownership is held in trust.

Let’s say Leanne has a balance of $400,000 in her super, meaning she may potentially own $400,000 worth of a managed fund or shares. Because Leanne operates an SMSF, she has instead taken $300,000 of that money as a deposit for an investment property, borrowing another $500,000 with an SMSF loan to buy an investment property worth $800,000.

If you do have an SMSF loan forming part of your investment portfolio and are on the hunt for a lower rate, be sure to check out our refinance SMSF loans.

First Home Owners

In essence, the first home owner super saver scheme (FHSS) allows first home buyers to save money for their first home inside their super fund. For first home buyers, the incentive lies in the fact that the scheme will help first home buyers save faster with the concessional tax treatment of superannuation.

The scheme does not allow first home buyers to directly purchase a property with their super unlike those with a SMSF, however it does allow first home buyers to build a deposit at a faster rate. From 1 July 2022, the amount of eligible contributions that can count towards your maximum releasable amount across all years of the scheme will increase from $30,000 to $50,000.

Final words

If you are looking to purchase a property with your super, you would need to do this through an SMSF. It’s important to note that once you reach your superannuation preservation age and your superannuation is unlocked, you may be able to use your superannuation to buy a house to live in, but you will need to withdraw it from your super account first and understand any tax consequences of doing so.

To get the most out of your property investments, chat to one of our lending specialists today about refinancing your SMSF loan.

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