For several years now, I have read articles that talk about how difficult it is for first home owners to enter the property market, particularly in our capital cities.
Many of you will have read that, in the 2017 budget, the government released an initiative to assist first home owners. I thought it might be interesting to take a closer look into this initiative.
What is this initiative? Well, first home buyers will be able to use up to a maximum of $30,000 per individual of voluntary superannuation contributions (plus the earnings generated from those savings) as a deposit on a property beginning 1 July 2018. These voluntary contributions were accepted from 1 July.
The way it works is, the employer would take money from the employee’s pre-tax earnings and put it into their super fund, where it will be taxed at just 15 per cent instead of the usual marginal tax rates. Earnings on these funds while in the super account will also only be taxed at 15 per cent.
Additionally, when these savings are withdrawn, tax will be paid at the marginal rate minus 30 percentage points. So, if the person is on a 37 cent rate, only 7 cents is paid in tax.
Looking at the numbers, what that means is, if a first home buyer earning $70,000 invests $10,000 a year into this new scheme for three years, they will be better off than putting the same amount into a bank account by about $7,000.
To many, this may seem like a great option. It is a tax break and it may be worth considering for those first home buyers who would like to purchase a home . . . in years to come.
However, how much will it really assist?
The first thing is that people need to have spare cash to put into this scheme. Low-income earners may not have the spare cash to put into their superannuation, so they are unable to take advantage of any of the benefits.
When considering the increase in prices in our capital cities (median price in Sydney is approximately $860,000, which is approximately a 15 per cent increase in the past year), the median price will likely increase further by the time those taking advantage of the scheme are ready to buy.
A minimum 5 per cent deposit on even a $700,000 purchase price is $35,000. On top of that is stamp duty, mortgage insurance, and all the other costs associated with the loan. Hence, $30,000 from contributions in many cases will not be enough to make a purchase.
The maximum that can be salary sacrificed in any year is $15,000, so it may take a number of years to save the amount you need to purchase if you are solely using this scheme to save.
The other item to note is that the extra money you have contributed to super cannot be withdrawn for any other purpose other than purchasing a property.
So the real question would or could be: what percentage of first home owners will this scheme really benefit?