Using the ‘Double Whammy’ to Buy a House

It’s no secret that it has become progressively harder to buy somewhere to live, and the latest Budget has arguably made it even more so.

However, there is an often missed “double whammy” approach that can be used to help children to eventually buy their first place without the massive financial stresses and risks of parents becoming the “bank of mum and dad”.

By using two government programs together, it is possible to save up to $50,000 for a first home and get some government money combined with the magic of compounding returns to do much of the heavy lifting.

Co-contribution the First Step

The first step is to use the $500 government low- and middle-income earner super co-contribution in conjunction with $1,000 of your own money to contribute to superannuation.

That $1,000 can come from parents or from the child but offers the prospect of a tax sheltered, instant 50% return on your money.

To qualify for the co-contribution the child must have a tax file number, be working and earning some money and to have opened a superannuation account.

Most super providers will open a new account for a child that fulfils these conditions.

The $1,000 can be contributed as a lump sum or as periodic payments weekly or monthly to smooth out cash flow and the $500 is automatically added by the government after the child or young adult submits their tax return.

The only catch – and it is a really big one – is that superannuation is usually locked away until the owner reaches the age of 60 and has stopped working or meets other conditions of release.

Then the Second ‘Whammy’

This seems to make this a fairly flawed strategy to save for a home loan – unless it is a retirement home – except for one thing: the government’s first home super saver scheme (FHSSS).

The FHSSS allows your child – who is now a young adult – to withdraw all of the personal non-concessional contributions they’ve made to their super, providing they haven’t claimed a tax deduction for them, up to a total of $50,000.

That includes all of those contributions made each year and the investment earnings associated with them which can be withdrawn under the FHSSS.

Unfortunately, the government co-contributions will need to stay in super but they will continue to compound nicely until retirement.

To qualify for the FHSSS, the child will need to have turned 18, although there is no restriction on them withdrawing non-concessional contributions made before then.

Low-Tax Environment

This can be a transformative way of saving for part or all of a house deposit because all of the compounding has happened within the low tax super environment.

So if, for example, the low fee super fund has made 7% a year and the strategy has run for ten years from 16 to 26, then the final balance will have grown to an impressive $23,675.

That is a great start for a house deposit without too much expense and depending on actual investment returns it may not take too many more years to compound so that a full $50,000 can be withdrawn.

While it is obviously not the full solution, the double whammy approach of using two government programs together is well worth considering for any children who have a part-time job if the parents can afford to make a $1,000 contribution each year.

Benefits of Compounding Early

The other great part of this strategy is that it remains a good result even if plans change and the now adult child decides against buying a house.

The superannuation put aside will continue to compound and because it will be invested for so long, the compounding effect will be very strong and should result in more than $300,000 of extra super by the time the child retires.

Perhaps the greatest lesson to be learned here is the power of compounding which applies across all areas of investment—plus the need to keep across government programs to see if they can help you achieve your investment goals.

Certainly, the “double whammy” approach results in a much better financial result than trying to invest outside of superannuation when the earnings would have attracted significant amounts of tax, depending on the child’s actual income.

Finally, the strategy is a nice way to encourage the continuation of a part-time job, which is also not a bad way for children to learn the value of labour as they grow up.