Good News for First Home Buyers

During the recent federal election, the Morrison Government (with the bi-partisan support of the Labor Party) announced the ‘First Home Loan Deposit Scheme’ for first home buyers. This scheme is designed to make it easier for first home buyers to get their foot in the door of the property market, and will accompany the existing ‘First Home Super Saver Scheme’ and for those living in NSW, the ‘First Home Owner Grant Scheme’.


So how do these schemes work, who is eligible and are they worthwhile? Read on to find out:

First Home Loan Deposit Scheme

The First Home Loan Deposit Scheme is set to be introduced on January 1st 2020, and will be available to first home buyers with an income of up to $125,000 (or $200,000 for a couple). Eligible buyers will now only need to save 5% for a deposit on their first home. The government will then guarantee their loan up to 20%. This has 2 key benefits for first home buyers:

  • Saving for a deposit can take many years and most lenders require at least a 10% deposit before they are willing to lend. This scheme will drastically reduce the time needed to save for a property, allowing first home buyers to get into the market sooner.
  • For deposits of less than 20%, lenders generally require that borrowers take out mortgage insurance. This is an additional cost to the borrower. This scheme will eliminate the need for lender’s mortgage insurance as the loan will be guaranteed up to 20%. This is estimated to save buyers around $10,000 on average over the life of their loan.

Some things to consider

  • The scheme will only be available to 10,000 homebuyers each year. In 2018 approximately 110,000 Australians bought their first home meaning that less than 10% of first home buyers in 2018 would have accessed the scheme. How these 10,000 applicants will be chosen remains unclear.
  • The government has suggested that there will be caps on the value of homes for which it will guarantee a deposit. These caps will be determined by the location of the property.
  • By taking out a mortgage with a smaller deposit, you will pay more interest over the life of the loan. Furthermore, lenders will need to be confident that you are able to meet the higher monthly repayments.

First Home Super Saver Scheme (FHSSS)

The FHSS Scheme allows you to save for your first home inside your superannuation fund, taking advantage of the concessionally taxed superannuation environment. Under the scheme, individuals can contribute up to $15,000 each financial year, up to a total of $30,000 across all years (since 2017), into their super funds as a concessional (or pre-tax) contribution. Couples can contribute up to $30,000 each year, up to a total of $60,000 across all years.

When you are ready to purchase your first home, you can apply to release these contributions, along with any associated earnings, to assist you with your purchase.

Who is eligible?

To qualify for the scheme, you must:

  • be over 18 years of age
  • have never owned a property before
  • have never requested a FHSS release before
  • live in the property for at least 6 out of the first 12 months of ownership
  • purchase the property within 12 months of the funds being released

How does it work?

When purchasing your property, you can apply to have a maximum of $15,000 of your voluntary contributions from any one financial year released under the FHSS scheme, up to a total of $30,000 across all years (for couples - $30,000 per year with a total of $60,000 across all years). You will also receive an amount of earnings that relate to those contributions.

When you contribute into your fund, the contributions are taxed at the super tax rate of 15%. Once the monies are released from your fund for the purpose of purchasing a property, you will pay your marginal tax rate. However, you will receive a 30% tax rebate resulting in an overall tax saving.

Example

Andrew earns $60,000 per year and wants to buy his first home. He has saved $100,000 for a deposit. Andrew receives some advice that he should utilise the FHSS Scheme. He considers whether the scheme is worthwhile.

Let us consider 2 scenarios. In Scenario A, Andrew does not use the scheme. In Scenario B, he does.

Scenario A:

Andrew earns $60,000 (before tax) each year. He decides that he would like to save $15,000 (before tax) of his earnings each year over 2 years. At his marginal tax rate, he pays 32.5% tax on this $30,000. Total tax payable is $9,750 leaving him with $20,250 for his deposit.

Scenario B:

Andrew contributes the $30,000 into his super fund over 2 financial years as concessional contributions (either through salary sacrifice or personal contributions). He is taxed at 15%, leaving $25,500 available for withdrawal. When he withdraws the funds, he is taxed at his marginal rate of 32.5% ($8,288). However, he also receives a 30% tax rebate ($7,650). Consequently, the net tax paid upon the withdrawal of the funds is only $638. This leaves Andrew with $24,862 for his deposit.

Therefore, after utilising the scheme, Andrew is $4,612 better off.

Some things to consider

  • It may take up to 25 business days for the ATO to authorise the release of funds. Buyers need to ensure that they leave plenty of time before applying for the funds to be released.
  • Super funds are not required to offer the ability to access the scheme. Buyers need to check with their super funds before proceeding.
  • Personal contributions made for the purpose of accessing the scheme are still counted under the normal $25,000 per annum concessional contributions cap. Buyers need to ensure that they do not exceed the cap when contributing.
  • The FHSS scheme funds must be released by the ATO before you sign a contract to purchase a property.
  • You must notify the ATO within 28 days of signing a purchase contract.
  • You must use the FHSS funds within 12 month of receiving them. Otherwise, you will need to either apply for a 12 month extension from the ATO, recontribute the amount into your super fund, or be subject to an additional 20% tax on the funds.

First Home Owners Grant (New Homes) Scheme

In NSW, if you are a first home buyer and you’re buying or building a new home, you may qualify for a $10,000 grant under the First Home Owners Grant Scheme. To apply for the grant, you need to lodge an application form either:

  • with your bank or financial institution when you're arranging finance to buy your home, or
  • with Revenue NSW if you’ve already completed the purchase process or construction has commenced.

Who is eligible?

To qualify for the scheme, you (or your spouse) must:

  • be an individual (not a company or trust)
  • be over 18 years of age
  • be an Australian citizen or permanent resident
  • not have owned or co-owned a property in Australia
  • not have received a first home owner grant in Australia
  • be purchasing a property that is newly constructed and has a total value of less than $600,000

or

  • be purchasing a block of land with the intention of building a dwelling where the total cost of the land and the dwelling is less than $750,000

Some things to consider

  • You need to occupy the home as your principal place of residence for at least 6 months continuously within 12 months of buying the property, or within 12 months of construction being completed.
  • Permanent members of the Australian Defence Force may be exempt from the 6 month residence requirement.
  • If your circumstances change after you’ve received the grant and you no longer meet the eligibility requirements, you will need to pay back the grant.

Date posted: 2019-06-26 | posted by: condell




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