New savings scheme to get you closer to home

The tax breaks and handouts are worth almost $1000 a year on a $5000 deposit. There will be up to $13,800 in free grants for first home buyers thanks to a junior version of super which begins on Wednesday. Pity about the four-year wait.

The Rudd Government's new home saver accounts aren't exactly a way of raiding your super for a home deposit - your home deposit can finish up in your super fund if you're not careful - but they'll give you up to $3400 ($6800 for a couple) plus tax breaks worth about $1000 a year.

They're not to be confused with the $7000 grant that first home owners can also get. You can avail yourself of both, though they have slightly different rules. Unlike the grant the new accounts don't mind if you've previously owned an investment property, and can be used for buying a block of land so long as you eventually build something.

Interest on the new first home saver accounts will be taxed at a flat 15percent, just like a super fund, and the Federal Government will put 17 per cent in as a grant. The most it will hand over in a year is $850, which requires a deposit of $5000.

Needless to say, you're only allowed one account. The Government isn't that silly. Or maybe it is. A couple can have separate accounts and so get twice as much, or a maximum of $6800 over four years. You won't get its contribution till you've filed your tax return - there's always a catch, isn't there? - but once in it'll earn interest.

Unlike super, you can't salary sacrifice into the account. So it's just like putting money in the bank. Withdrawals, which can't be made for four years, are tax free as well. But they have to be used to buy a first property - as a deposit, for legal fees, stamp duty or whatever, is up to you. And no, you can't stick the $7000 home grant into the account. By the time you get the grant, the account will have closed. Otherwise your savings will have been flicked into your super fund, untouchable for another 40 or 50 years.

Oh, did I mention you have to buy a place before you turn 65? Better get moving. Change your mind about buying a property, however, and the Government will have no hesitation in shifting your money into a super fund. That'll teach you.

The other condition is you must deposit at least $1000 in each of four financial years. At least they don't have to be consecutive. If you've already saved, say, $6000, don't put it all in at once. You'd do better to put $5000 in straightaway, and leave the other $1000 for after July 1 so as to get the Government contribution and a credit for two years' saving. By the way, only one partner of a couple has to meet the four-year rule when taking the money out. The most you can put into the account is $75,000 though this is also indexed.

Only two big banks will have the accounts running on Wednesday - ANZ will pay 7percent (you must deposit $10 or more a month); Commonwealth, 6.5percent. Remarkably, none of the accounts have fees. AMP Banking will offer a honeymoon rate of 8percent; the rate reverts to 7percent from January 1. These rates are variable. Sorry, there's no term deposit-style fixed-rate version.

The tax breaks and handouts are worth almost $1000 a year on a $5000 deposit for those in the 30percent bracket. Anybody can make a deposit into the account.

"It's a great way for parents and grandparents to help ... they can be secure in the knowledge that the money can't be frittered away on overseas trips and things," said Steve James, chief executive of Teachers Credit Union.

Hmm. Don't tell mum or dad, but there could be a case for letting the grants go and saving like mad instead so you can buy an investment property. That way you keep costs down by living with mum and dad, collect the rent and reap any future capital gains. Mum's the word.

Case study
Having saved $2000in only a couple of months from his hospital clerical job, Garry Smith is champing at the bit to get into the new firsthome saver accounts. The 18-year-old will get a government grant of $340and pay only 15 per cent tax on the 7 per cent interest the Teachers Credit Union pays.

more here
http://www.domain.com.au/Public/fhb...=New savings scheme to get you closer to home

 

Hi BV,

I could only find the ANZ and Teachers Credit Union FSG's for FHSA.

Kudos goes to them for getting their act together.

I couldn't find the AMP or CBA ones, maybe they'll pop up later in the day.

Cheers,

Dan

 

My understanding is that you are still eligible for the first home owners grant if you have own an investment property as long as it was purchased after 1st July 2000 and as long as you haven't lived in it for six months.

There was a thread on it somewhere a few months ago, but I can't find it currently.

Regards,

JR

 

Dan
Perhaps their websites are not up to date.
Cheers

 

JR

Yes that's correct
If you do not and have not previously lived in your investment property, then it is not considered your home. Therefore, you will be eligible to open an account provided you meet the other eligibility criteria.

Here is the link to the FAQ section and factsheet of the homesaver's website

Home Saver Accounts - Fact Sheet

Home Saver Accounts - Fact Sheet

 

Does anybody know about the portability of this account. Surely it must allow a consumer to switch providers if a more competitive deal comes up. It would be sad to lock yourself into a variable rate of 7% with either NAB or CBA, when it seems likely with increased competition their may be more attractive offers.

 

Individuals will be able to change FHSA providers. Account providers will need to transfer an account balance to another provider within 30 days of a request from the account holder.

Home Saver Accounts - Fact Sheet

 

I was going to open one of these accounts - not that I want to buy a home - but it would be good to get some tax effective savings that I can touch before preservation age. I was thinking more along the lines of - open account now and keep dumping money in there, and use the proceeds to supplement buying a place when I 'retire' before preservation age.

I was under the impression that you could invest in something other than cash:
from the treasury site:

but it looks like only a handful of banks and credit unions are providing options, the superfunds and investment providers have put it in the too hard basket.

So it is not going to be worth it for long-term savings. If you are saving more than 5 years you are better off with a geared growth portfolio than a tax-effective cash savings account.

 

I agree Bella.

Choice did a comparison CHOICE - First Home Saver Accounts

The majority are paying around 7% pa.

Choice seems to forget that these are Authorised Deposit taking Institutions (ADIs) which basically means savings accounts though they seem to expect amazing interest rates...

APRA has a list of all ADIs and Life companies who have advised that they are going to offer FHSAs (First Home Saver Accounts - July 2008)

At the moment there are no Registrable Superannuation Entity (RSEs) who have advised that they are going to offer FHSAs (only ADIs) which is very disappointing.

Hopefully an RSE will have FHSAs shortly.

On another note, you may want to look into Tax Effective Investment Bonds (or ten year bonds) as well.

Cheers,

Dan

PS Before making an investment decision speak to your FPA registered Financial Planner.

 

I read about this new homesaver scheme with interest and whilst I agree that it's certainly not likely to drive hordes of home owners to the market in 4-5 yrs it's at least a step in the right direction in encouraging cash savings plans for first home owners and investors.
Over time, the tightening regulations on new lending will also mean that deposits for homes need to be larger, with 105% loans less of a "sure thing" as opposed to the rampant lending that we've seen in the past decade. The days of easy credit are over for a while, that's for sure.

Agree with Bill that the mandatory 4 yrs is too long, however, as this means that enthusiastic buyers may miss out on the bargains that may well emerge in the next 0-4 yrs, preventing them from purchasing and instead being penalized by rolling over those hard won savings into super if they stray. Yes, the 17% govt contribution and the discounted 15% tax rate on account interest is an incentive, but probably not enough to make a significant impact. Time will tell, but at least it's a step in the right direction in encouraging and fostering cash savings.

 

One can argue if this meant to help first home buyers or just create another property boom in 4 years time. Just imagine scenario: In 4 years time markets stabilise, US property prices start to go up again, this will trigger some kind of up movement in Australia as well. Then everyone starts buying first property and push prices up so they “don’t miss opportunity” before house prices again get to the levels of “unfordable”. They start kicking themselves for missing the opportunity while prices where steady. Next painful realisation – 17% looks nothing compares to 30% of capital gains in the last 12 months. Oh NO!!!!! We missed it again, How on earth rich is allays winning? This brings me to conclusion – buy when the market is low, sale when is on the way up. Is it another bubble in making? It will take some time to engineer it but is highly possible.

 

Hi DudeK,

It definitely is going to help prices be larger than they would be if people didn't have the government contribution and concessionally taxed environment known as the FHSA...

Cheers,

Dan

 

Best accounts paying variable interest at 7% and higher

CHOICE has released a report that helps prospective home buyers find the best deposit First Home Saver Accounts (FHSAs) utilising the new government scheme which launches today.

The consumer group has obtained details in advance from various financial institutions offering the FHSA and ranked the accounts based on a benchmark which takes into account the interest rate, account keeping and exit fees, fair and simple interest calculations and minimum deposit requirements.

The FHSA provides incentives for those trying to break into the property market by creating accounts where the government will contribute up to 17% of what you save, with a maximum co-contribution of $850 per financial year.

The three institutions which meet the benchmark so far are AMP Bank, NSW Teachers Credit Union and Victorian Teachers Credit Union.

FHSAs which don’t meet the standard include Commonwealth Bank because its interest rate is currently below the Reserve Bank of Australia’s cash rate and interest is credited annually instead of the preferred monthly or quarterly regime.

“CHOICE has discovered not all of these accounts are created equal and consumers need to be aware that not only do the interest rates on offer differ but the way interest is calculated can make a big difference to the final deposit that’s saved,” said CHOICE media spokesman Christopher Zinn.

“For example, ANZ pays 6.99% bonus interest in months when regular savers make a deposit, but in other months accounts earn just 0.01%.”

CHOICE says the accounts which don’t meet the benchmark may penalise consumers who want to switch to a different account provider (with an exit fee), offer differing interest rates depending on how much you deposit or credit interest annually instead of quarterly or monthly.

Most of the accounts can provide good returns and some offer incentives like waiving mortgage establishment fees in the future, but consumers should compare the conditions and benefits before choosing.

more here
CHOICE - CHOICE ranks the new First Home Savers Accounts

 

Choice Step by step guide

Can you wait four (financial) years? If you think you might be ready to buy your first home sooner, then don’t open a FHSA. You won’t be able to withdraw money from the account for your deposit or mortgage repayments; In that case the balance of your account will have to divert to your super fund.

Will the FHSA give you a tax advantage? For many people, 15% is less than the tax rate they’d pay on a regular savings account (which is taxed at your income tax rate). However, if you don’t pay tax, you could be better off leaving your money in a regular high interest savings account for now, and opening an FHSA just before the end of the financial year, in time to get the government’s 17% contribution.


Decide between a deposit or investment-style account. Assuming investment fund FHSAs come on to the market, consider the pros and cons of each. Essentially, a deposit account is safe but may not provide as high returns. The value of an investment-style account may fluctuate (just look at what’s happened with super funds over the last 12 months), but could provide higher returns over the medium to long term (five years and longer).


Compare providers and offers. The comparison table lists most of the accounts available October 1. Remember to check Product Disclosure Statements for fees, interest rates and conditions. Even deposit accounts that have no account fee or switching fee may have other costs, such as direct debit dishonour penalties, for example.


Wait and see. More accounts will be launched over the coming weeks and months, so you may benefit from waiting to see if price competition leads to better offers. Already we’re seeing evidence of providers improving their interest rates and conditions as new competitors announce details of their offers. The disadvantage of waiting is that you are postponing the benefit of the lower FHSA tax rates.


Monitor the market. Interest rates and fees can change, so you can switch to another FHSA provider if your account becomes uncompetitive. Check if an exit fee will apply. It’s also worth keeping an eye on the maximum government contribution, which will be indexed and can increase from $850 per year over time. The maximum account balance (currently $75,000) will also be indexed.

 

One other disadvantage in waiting for a better deal (if you wait till after end of the financial year that is) is that it will be longer before you can withdraw.

I don't have much confidence in there being a lot of competition between providers given the limited market and high administrative overhead.

They probably should have made it open to more people to make running costs more efficient, eg. make it more multipurpose so one could use it for approved things like education, having a baby (maternity fund), or open it to all non-homeowners instead of just first home buyers; or even just open it to everyone for any purpose and limit it by one account per person per lifetime and forcing people to close account on withdrawal.