Question: I’m looking to buy a home in the next couple of years and have heard about the First Home Super Saver Scheme. Is it worth it?

Kyle’s answer:

Saving for your first home is tough so any advantage you can give to give your savings a boost is great.

The First Home Super Saver Scheme (FHSSS) is a newish scheme where you can make voluntary contributions to super and save tax and withdraw these contributions (plus earnings) to use for your first home deposit.

The scheme allows you to contribute up to $15,000 per year (up to a max of $30,000) however these contributions count towards your normal contribution caps of $25,000 for concessional contributions and $100,000 for non-concessional contributions.

Source: Rask Finance

The main benefit of this scheme is when you make concessional contributions by salary sacrificing or making personal contributions and claiming a tax deduction.

So how much is this tax saving?

Tax rate Tax savings (%) Tax saving on $15,000 ($)
0% -15% -$2,250
21% 6% $900
34.5% 15.5% $2,325
39% 15.9% $2,385
47% 16.7% $2,505

 As can be seen, the tax savings are great!

Keep in mind this is based on $15,000, so you can double these if you make use of the maximum $30,000 and double these again if you and your partner both do it! I’ll also note that these tax savings are immediate if you salary sacrifice, however, if you make a contribution and then claim a tax deduction, you won’t see the benefit until you submit your tax return. The investment earnings in super are also taxed lower than in your personal name so this is another advantage.

The disadvantage to this strategy is that it’s a stupidly complicated way to achieve a relatively simple outcome and there are admin hurdles. Such details are you have to make the contribution, claim a tax deduction (if this is your plan), get a release authority from the ATO, apply to your super fund to release your funds, the fund will pay the funds to the ATO who will then pay the funds to you (after they’ve taken out applicable taxes).

These steps don’t happen overnight and must be completed prior to signing a contract so would ideally want this all completed prior to starting your home search as you wouldn’t want to miss out on a home because your deposit can’t be withdrawn in time. Once your deposit has been released you have 12 months to purchase a home or another 12-month extension can be applied for.

The other issue is that Labor has proposed to abolish this scheme and given they’re the favourite to win the election in a couple of months time this brings with it political risk. Any contributions made prior to then almost certainly would be “grandfathered” so that they can still be withdrawn but is another thing to take into account.

Another issue is a lot of super funds aren’t totally across this scheme and I’ve heard of funds not allowing it. Make sure you have a chat to your fund to confirm that they support it and will release your funds prior to making any additional contributions. 

Lastly, most of our super money is predominately invested in growth investments, which bring with it volatility. This investment strategy probably isn’t appropriate for most home deposits as these home deposits may be needed in the next few years, so defensive investments like cash are often a more appropriate investment. When calculating how much you can release, the ATO assumes a standard return (currently 4.96%) which is better than a cash return. However, these funds are still invested in ‘growth assets’ (e.g. shares). If returns are greater than 4.96% over this time, great.

However, if they’re less than this you’re effectively stealing from your super balance/future self. For this reason, I think these funds should be invested in super the same as you would invest outside of super and this can be achieved by altering your investment preferences in your super account or if you want to keep it really clean, possibly opening a 100% separate super fund that’s invested as you would outside so long as the fees aren’t high! 

Question: I have funds in my offset account saving me interest on my home loan however I am interested in investing. Should I use these funds to invest?

Kyle’s answer:

Offset accounts/paying down your mortgage is often a great strategy as you save interest (say 4%) and as this interest is paid with after-tax money, it’s effectively like receiving the below investment returns pre-tax.

Tax rate Return at 4% interest rate (before tax)
0% 4%
21% 5.06%
34.5% 6.11%
39% 6.56%
47% 7.55%

As these returns are essentially risk-free, these returns are pretty attractive so would be looking for a higher return to compensate you for taking on the additional risk, something that might be hard to come by.

Fortunately, this isn’t the only option. Instead of drawing funds out of your offset account (and effectively increasing your net non-deductible borrowings) it makes a lot more sense to keep these funds in your offset account and set-up a separate borrowing facility by utilising the equity in your home (may not be possible for all).

By using this facility for investment purposes, you will get a tax deduction for the interest (say 4%) so the investment hurdle now is 4%. This means, if your investment earns more than 4% (or whatever your interest rate is) you will be better off and if it earns less than this you will be worse off.

Borrowing to invest always brings with it risk however historically investment returns from the sharemarket have been greater than the cost to borrow over the long-term so it could be a worthwhile long-term strategy.

Kyle Frost is an independent financial adviser at Millennial Independent Advice where he helps people in their 20’s and 30’s make smart decisions with their money. Click here to subscribe to his updates.