Saving for a deposit using the First Home Super Saver scheme

Buying your first home in Australia can be difficult due to the high property prices and the difficulties of saving money. Although there are first home buyer schemes that let you buy your first home sooner, you run the risk of buying a home too soon when you are not financially ready, putting yourself in financial stress. 

Hence, the only guarantee to buy your first home without getting into financial stress is by saving money. Thankfully, there is an effective way of saving money via super: the First Home Super Saver (FHSS) scheme. In this blog post, I will talk about how you can save money towards your first home via the FHSS scheme and the benefits of using that scheme. 

What is the First Home Super Saver scheme?

The FHSS scheme is a federal government scheme where you can save money in super to buy your first home. You can make voluntary contributions to your super in addition to compulsory superannuation payments made by your employer. In total, you can voluntarily contribute up to $15,000 per financial year and a total of $50,000 across all years. These voluntary contributions can be made as a:

1. Concessional contribution, where money voluntarily placed in super is claimed as a tax deduction. This can be done via a salary sacrifice, where you contribute some before-tax dollars into super, or as a voluntary contribution from your after-tax dollars where you subsequently claim a tax deduction.
2. Non-concessional contribution, where you contribute after-tax dollars to super without claiming a tax deduction.

Then, when you are ready to search for your first home, you can release money that you voluntarily contributed into super, plus any associated earnings that come with storing money in super. There are two parts to withdrawing money from super under the FHSS scheme: the FHSS determination and the FHSS release request.

FHSS determinations

Before you can release money from super under the FHSS scheme, you have to first apply for and receive an FHSS determination. An FHSS determination sets out the maximum amount of money that can be released from super under the FHSS scheme. This is known as the FHSS maximum release amount. You can request an FHSS determination via ATO online services in myGov. Follow the steps below to request an FHSS determination.

Note that you cannot withdraw compulsory superannuation contributions from your employer under the FHSS scheme. 

You can request as many FHSS determinations as you like every 60 days to capture any new voluntary super contributions and associated earnings. However, once you sign a contract to buy property or request a release of money from super under the FHSS scheme, you cannot request any more FHSS determinations.

Releasing funds under the FHSS scheme

Once you receive an FHSS determination, you can send an FHSS release request to the ATO via myGov. The ATO will ask the super fund to release the required amount to them before depositing it to your bank account. This request can be made any time before signing a contract to purchase a property, or up to 14 days after signing a contract. The amount of money released under the FHSS scheme needs to be included in your tax return for the financial year, though you will receive a 30% tax offset that reduces the amount of tax payable.

Once you request a release under the FHSS scheme, you have 12 months to sign a contract to purchase or construct your home. If this does not happen within that period of time, the ATO may grant you an automatic 12 month extension. If you still do not sign a contract to purchase or construct a home during the extension period, you can either:

1. Recontribute the released amounts into your super; or 
2. Keep the released amount and pay a 20% FHSS tax.

Once you have signed a contract to purchase or construct your home, you have to notify the ATO within 28 days. 

Eligibility criteria for the FHSS scheme

To be eligible for the FHSS, you need to:

1. Be 18 years or over when requesting an FHSS determination or FHSS release (though you can start making voluntary super contributions from under 18 years of age). 
2. Not previously made an FHSS release request under the FHSS scheme. 
3. Never owned or have acquired an interest in residential, commercial or investment property or vacant land in Australia.
   • The only exception to this rule is where a person has suffered financial hardship that resulted in a loss of all property, and the person did not acquire subsequent property or vacant land since then. Financial hardship includes bankruptcy, divorce or separation, loss of employment, natural disaster or illness. 
   • Financial hardship provisions need to be requested and then provided to the ATO before the person can start saving money in super under the FHSS scheme.
4. Furthermore, once you have purchased a property or vacant land in Australia under the FHSS scheme, you need to occupy it for at least 6 out of the first 12 months of ownership. 

The benefits of the FHSS scheme

There are numerous benefits to saving money under the FHSS scheme to buy your first home.

1) Another way to save money

The FHSS scheme is another way to save money towards your first home, in a place that is harder to access. You could save money in a bank account to buy your first home. However, if you structure your bank accounts incorrectly, you could find yourself raiding your bank account regularly to spend frivolously on useless things. 

By saving money in super towards your first home, you cannot access money to spend frivolously as super is normally inaccessible until you reach old age. You can only get your money from super once you receive an FHSS determination and send an FHSS release request. This allows you to build up your savings in super that is dedicated to your first home. 

2) Earn more money

You could potentially earn more money via super to buy your first home compared to a bank account, even if the super fund loses money during an economic downturn. When you withdraw money from super under an FHSS release request, you don’t take the associated earnings or losses from your super contributions. Instead, you receive interest based on the SIC rate on your contributions, set at 3% more than the base interest rate when the contribution was made. That means low returns or losses from your super fund during an economic downturn do not transfer over to your voluntary contributions. Hence, you do not lose any money under the FHSS scheme.

Furthermore, under conditions of high interest rates (graph below), you can earn more money due to the increased SIC rates (orange line) compared to a savings account. This rate can sometimes outpace inflation (grey line), meaning that your money grows faster than price increases, preserving your wealth. In comparison, storing money in a savings account could result in you losing money as the money you earn in interest (blue line) is eroded by price increases (grey line).

Hence, the FHSS scheme is a safe place to grow your money to buy your first home. 

3) Tax effective

The FHSS scheme is tax effective, where you pay less tax. Have a look at a sample calculation where you save $10,000 under a savings account or super towards your first home.

Scenario 1: In a savings account

Scenario 2: In super

You save $10,000 in a savings account which grows at 5% p.a.   After one year, you earn $500 in interest, resulting in a total of $10,500.    You are charged tax at 34.5% (32.5% marginal plus a 2% Medicare levy) to both your $10,000 deposit and $500 interest.   Hence, you pay $3622.50 in tax, leaving you with $6,877.50.

You save $10,000 in super and claim a tax deduction, making it a concessional contribution.    This attracts a concessional tax rate of 15%, so you keep $8,500.    After one year, you apply for an FHSS determination which allows you to withdraw $8,500 plus associated earnings of 7% p.a ($595). This results in a FHSS maximum release amount of $9,095.   You request a release of the FHSS maximum release amount. This attracts a tax rate of 4.5% of the release amount (32.5% marginal plus 2% Medicare levy, less a 30% tax offset).    You pay $409.28 in tax ($1909.28 total in tax), leaving you with $8,685.72.

As you can see, you can earn around $1,800 more if you save $10,000 in super and release it under the FHSS scheme, compared to putting it under a savings account. This is because tax rates are lower in super, not only while inside super but also when releasing it. In comparison, marginal tax rates are high and are charged to both money saved in a savings account and any interest earned. Also, you can earn more money under super under the FHSS scheme compared to a savings account due to the higher SIC rates charged under the FHSS scheme.

Overall, you can save more money from earning money under the FHSS scheme while paying less tax.

4) Fewer conditions

There are fewer conditions to using the FHSS scheme compared to other first home buyer schemes. The FHSS scheme just requires you to have never owned or bought any property and to live in your first home for at least 6 out of the first 12 months of ownership. Furthermore, you can buy any new or existing property anywhere in Australia, whether it is a house, townhouse or apartment. In contrast, many first home buyer schemes have restrictions on the places or properties you can live in, and stricter conditions as to how long you need to live in the property or how to maintain it. Hence, as long as you do not have any property, the FHSS scheme is an easy scheme to apply for. 

My personal experiences of using the First Home Super Saver scheme

I am using the FHSS scheme alongside my bank account to save money towards my first home. That is because I can only save up to $50,000 via the FHSS scheme, but an unlimited amount of money under a bank account. 

Having saved money in my bank account towards my first home, I first saved money using the FHSS scheme in the second half of FY2021-22. I initially contributed $15,000 from my bank account as a personal super contribution which I then claimed as a tax deduction. This allowed me to reduce the amount of tax I needed to pay, resulting in a huge tax refund.

From the beginning of FY2022-23, I salary sacrificed a set amount of money into super to save towards my first home. At the same time, I was still setting aside a portion of my salary plus excess savings towards my first home in my bank account. 

By the time I start looking for my first home, I will have saved around $40k under the FHSS scheme and $90k in my bank account. That will give me enough money to put down a deposit to buy my first home, cover any associated costs from buying and moving into my first home and provide a buffer to start paying off my mortgage.

Conclusion

You might not have much money saved towards your first home. However, if you start saving money in your super via the FHSS scheme, you can grow your savings in a relatively safe place that is harder to access. If you combine the FHSS scheme with money placed in a bank account, you can slowly but steadily grow your money, to the point where you have enough money to be financially secure and start searching for your first home.

The FHSS scheme is something that not many people know about. However, it is a hidden gem that harnesses the low-tax environment of super to save money. Hence, you should definitely consider it if you are looking to buy your first home in a few years’ time.

References

• Australian Taxation Office. (2024). First home super saver scheme. Last accessed 17 January 2024 from: https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/early-access-to-super/first-home-super-saver-scheme.
• Australian Taxation Office. (2023). GN 2018/1: First home super saver scheme. Last accessed 17 January 2024 from: https://www.ato.gov.au/law/view/document?docid=GDN/GDN20181/NAT/ATO/00001&PiT=20230412000001.
• Australian Taxation Office. (2023). LCR 2018/5: First home super saver scheme. Last accessed 17 January 2024 from:https://www.ato.gov.au/law/view/document?LocID=%22COG%2FLCR20185%2FNAT%2FATO%22&PiT=20230412000001.

Financial disclaimer

Anything that is posted on The Active Evaluator blog is for general informational purposes only. You should not interpret this information as formal financial advice. If you would like advice tailored to your personal situation, please seek an accredited professional. I am not responsible for any subsequent actions you take by reading my blog as well as any expenses, costs, losses, damages and injuries you or another person may incur in the process.