Wednesday, 13 April 2011

The little-known 'First Home Savers Account'

by Rob d'Apice
Many prospective first-home buyers know the state government will give you a $7k grant toward your first home (the First Home Owner Grant).  Quite a few also know about the first home owner stamp duty relief, that can save up to $18k in avoided duty depending on the cost of the house (the elusively named First Home Plus Scheme).  But few people are aware of the First Home Savers Account - a recently introduced federal government scheme to help you save toward your first home.

What is the First Home Savers Account?

The First Home Savers Account was an election promise of the 2007 Labor platform - and became effective 1 October 2008.  The basic features of the account are:
  • Government contributions: Each year, the government will contribute an amount equal to 17% of the savings you have placed in the account - capped at $935.  This amount is indexed and will increase over the life of your account.
  • Reduced tax rate on interest: You will only pay 15% tax on the interest you earn in the saving account (if your taxable earnings are between $37k and $80k, this is a 50% discount on the tax you would otherwise pay).

There are a few things to keep in mind in deciding whether the account makes sense for you:
  • The four-year rule: You cannot withdraw your money until you have made at least a $1,000 deposit in four separate financial years (they don't have to be consecutive).
  • Changing your mind: If you purchase a house before you have satisfied the four-year rule, or if you decide to discontinue your contributions, you cannot withdraw the money for another purpose - the funds must be transferred into your superannuation and cannot be accessed (generally) until retirement. [EDIT (17/06/2010): These rules have now changed!  Check out our update post now.]

The account is perfect for you if you know:
  1. That you definitely want to buy a house sometime down the track; and
  2. That the purchase won't take place in the next 4 years [EDIT (17/06/2010): No longer true!  Check out our update post now.]

One other pointer worth noting: the accounts are linked to individuals, not couples - so you and your partner can both open an account.  Furthermore, only one of you needs to satisfy the four-year rule.  That means if Bob has been saving in his First Home Saver Account for four years, but Jane only opened her account two years ago, Janes can still withdraw her money to use with Bob on that new condominium.  So if your partner has already knocked off a bunch of the years in their four-year requirement, why not consider opening an account now?

How much is it worth, really? 

If you can save $400 per month for 4 years, the total gov't contributions (including interest) would amount to $3,560 PLUS $310 in avoided tax on your savings (if you are in the 30% tax bracket, ie earning > $36k pa).  A grand total of $3,870.

Where to get one?

The First Home Savers Accounts are managed through the banks - each have their own accounts offering the above features with their own interest rates, so it's worth having a look around at what's available.  

At time of writing, the Members Equity Bank (meBank) appear to have the best offering with a 5.50% variable interest rate, followed up by ANZ at 5.25% (if you want a big brand) [EDIT 15/2/2012: ANZ is no longer offerring FHSAs to new customers. To find the best deal, create a free account with Prosple and we'll help find the best plan for you!].  Be warned: some banks only credit the interest annually (eg Commonwealth bank), so you'll end up with less interest earned overall.

Choice magazine did a great comparison of the offers back in August 2009 - worth checking out if you're looking into one of these accounts.

The ATO website is also a good stop for any more information.

4 comments:

  1. Interesting, I had no idea this existed (though I haven't given the slightest thought to buying a home yet). It seems like a good idea, especially nearing the end of financial year. Any info on how/when the man chips in (I haven't found anything yet)?

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  2. From the me bank PDS:
    Government contributions are paid directly into your First Home
    Saver Account after you have lodged your tax return and ME Bank has
    told the Tax Office how much you have put in.

    So gov't contribution happens once a year, it appears (which means the maths I did to calculate the total gov't contribution may be $50-$100 off or something).

    That means that if you deposit right now, it's really only a 3 to 3.5 year wait. Interesting!

    The best time to start one of these accounts is exactly when the you haven't given the slightest thought to home ownership (by the time you have, it's too late really). So I'd seriously consider it. But just be sure you're willing to commit to the full time period once you start, because there is no going back.

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  3. Another interesting point that I found on the ATO website is that there was an amendment to this policy in 2010.

    Essentially the change allows you to buy your first home before you have met the obligations (i.e. 4 years of at least $1000) and then allows you to use the cash in the account against an approved mortgage once you have met the requirements (i.e. once your 4 years are up).

    See here for the details >> http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/content/00250962.htm&page=16

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  4. Good pick up! I think, given financial year end is approaching, this is worthy of a repost.

    That change in policy eliminates the one real deterrent from getting on of these accounts, I think I'll be opening one pronto...

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