With housing affordability issues currently getting plenty of media focus, I’m going to take a look at an approach that may be of interest to those looking to enter the property market for the first time. It’s also a good way for parents to encourage and even assist their children to get out of the family home so they can finally enjoy some peace and quiet!
The Australian Government started a scheme in 2008 called “The First Home Saver Account” (FHSA). It is an initiative designed to tackle the current housing affordability issues and give first home owners a solid start. The scheme provides a simple, tax-effective way of saving for your first home, with the bonus of Government contributions of up to 17%.
The idea is to give an incentive to save, with the target being the deposit required to secure a loan for that first home. To reward savers, the Government will add contributions based on what you save and provide tax breaks on the interest earned along the way. So far it sounds too good to be true!
Each year the Government will contribute an amount equal to 17% of your personal contributions, up to a maximum which is currently set at $5,500. So if you can save that amount, the Government will top up your savings by $935. Now that is a good help along.
The scheme also pays interest on your savings that are generally comparable with term deposit rates. You will need to do your own comparisons but the rates should be competitive.
Interest earnings from the FHSA scheme are concessionally taxed at 15%, as opposed to your marginal tax rate which can be as high as 46.5%. Hang on, we are talking about first home buyers so maybe your tax rate won’t be that high, but even so it can still represent a good boost to your savings levels.
Also handy is the fact you don’t need to report anything when completing your tax return, as it’s all taken care of by the FHSA provider (bank, credit union etc).
An example of how it can work
Alice is aged 18 and is looking to buy a property but wants to save a 20% deposit to avoid paying mortgage protection insurance. She expects to spend $350,000 on a property and therefore will require a deposit of $70,000.
Her parents are supportive of Alice’s desire to buy a property and move out. To help Alice get her savings on track, they have struck an agreement with Alice. For the first three years they will match Alice’s savings dollar for dollar up to $3,000 and the savings are to be placed in a First Home Saver Account.
Alice, not wanting to put her life on hold too much, believes she’ll be able to save $100 a week or $5,200 per year.
In the initial 3 years Alice’s savings (with the help of her parents who have agreed to contribute $3,000/year) will be:
- $5,200 + $3,000 = $8,200/year
On top of this the Government will contribute 17% up to the current maximum amount of $5,500
- $5,500 x 17% = $935/year
Therefore, each year $9,135 ($5,200 + $3,000 + $935) will be added to her FHSA , which pays interest of 5.5%.
Being delighted at the results of her savings after the 3 year parent subsidising period, Alice decides to up her savings to maintain the yearly savings at $8,200/year, and is now putting aside $157.70/week.
As a result of this savings plan Alice is able to reach her goal of saving $70,000 for her home deposit just after her 24th birthday.
The $70,000 will be made up of:
- $42,250 – Alice’s savings
- $9,000 – Alice’s parents contribution
- $6,545 – Government co-contribution
- $12,205 – Interest from the FHSA provider
Of course there are factors to consider before proceeding with opening an account, and it is a good idea to get advice before jumping in. Some of the factors include:
- Setting realistic savings goals
- Eligibility for opening an account
- Choosing the account provider for your FHSA
- There are specific requirements around accessing your funds and these need to be fully understood
We can help with any questions you may have about these issues or more information is available at the Guide To First Home Saver Accounts
If you wish to look at how your savings plan could work with a FHSA, click on the link http://www.moneysmart.gov.au/ and navigate to ‘more calculators’ followed by "First Home Saver Calculator".
*Image by nickcname via Flikr