First home saver accounts

A new government scheme provides incentives for new home buyers, but watch for traps.
 
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01 .Introduction

Keys

Warning: Can you wait four or more (financial) years before buying your first home?

If you think you might be ready to buy your first home sooner, then don’t open a First Home Saver Account (FHSA). You won’t be able to withdraw money from the account for your deposit or mortgage repayments; the balance of your account will divert to your super fund.



Please note: this information was current as of August 2009 but is still a useful guide to today's market..


In brief

  • The government will contribute up to 17% of what you save into a First Home Saver Account.
  • Interest is taxed at a low rate of 15%.
  • Banks and other financial institutions will pay interest too. The best rate was 6% per annum at August 2009, and that's in addition to the government's 17% contribution.

To provide incentives for people to save for their first home, the federal government launched the first home saver account (FHSA) scheme in October 2008. Accounts may be offered by banks, building societies, credit unions, life insurance companies and public offer super funds (not self-managed super funds). They’ll set their own fees and interest rates, but have to comply with the government rules for the scheme.

To be eligible to open an account you must be at least 18 years old and under 65, have a Tax File Number, and never have owned a home you lived in (you could, however, have owned an investment property if you meet the conditions).

CHOICE benchmark for deposit FHSAs

Banks, building societies and credit unions have already started to offer deposit-style FHSAs, similar in most ways to ‘normal’ savings accounts. We’ve set a benchmark for the minimum standards we think you should look for from deposit FHSAs. Some of the accounts that fall just short of the benchmark can still provide good returns, but this standard is a guide to accounts that tick all the boxes — for being simple, fair accounts with a comparatively high interest rate:

  • Interest rate that matches or exceeds the Reserve Bank cash rate (3% at August 2009).
  • Fair and simple interest (no tiered interest rates, for example).
  • No account keeping fee.
  • No switching fee.
  • No fee to make deposits.
  • No minimum deposit or regular savings requirement to get the full interest rate.
  • Interest calculated daily and compounded monthly or quarterly on the full account balance (monthly is better).

The table shows how the accounts available so far compare on these criteria. Even after opening an account, you should continue to monitor how it compares with others – you can switch to another FHSA provider if your interest rate becomes uncompetitive.

 
 

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  • For every dollar you put into a FHSA, the government will add 17 cents. The maximum government co-contribution is $850 for each financial year (indexed, so the figure will increase over time). This year, if you put in $5000, the government will add $850. You can contribute more if you like, but only the first $5000 is eligible for the government’s 17% co-contribution.
  • The government contribution will be received in the financial year after you lodge your income tax return and the FHSA provider files its reports with the tax office.
  • You’ll also be able to earn interest at the rate the account provider offers or depending on investment performance.
  • 15% tax applies to the interest or growth of the account. Tax is paid by the account provider.
  • You must keep the account open for at least four separate financial years (they don’t have to be consecutive years) and contribute at least $1000 each year before withdrawals can be made.
  • The maximum account balance is currently $75,000 (including any government contributions, interest earned, your savings, etc). The figure will be indexed over time and can increase in $5000 increments.
  • You can only withdraw money to buy or build your first home. If you close the account for another reason, its balance is automatically transferred to super. Withdrawals after four years to buy a home, or transfers to super, are tax-free.

Results table

Full results for all models are shown in the table below.  

 
  First home saver accounts compared
Institution Variable interest rate (%, pa) Reason failed benchmark Account fee Interest credited Minimum contribution Switch or exit fee Other details
Accounts that meet CHOICE benchmark (listed by maximum interest rate)
Members Equity Bank
www.membersequitybank.com.au
6.00 NA No Monthly No No
 
ANZ Bank
www.anz.com
3.75
          NA
No Monthly No No
 
Teachers Mutual Bank
www.tmbank.com.au
3.75 NA No Monthly No No
Available to all eligible Australian residents, not just teachers and their families
Hume Building Society
www.humebuild.com.au
3.60 NA
 
No Monthly No No
Victoria Teachers Credit Union
www.victeach.com.au
3.50 NA No Quarterly No No
Home loan establishment fee waived for new homeloan customers who had a FHSA with the credit union
Big Sky
www.bigsky.net.au
3.05 NA No Monthly No No
AMP Bank
www.amp.com.au
3.00 NA No Monthly No No
 
Police Credit
www.policecredit.com.au
3.00 NA No Quarterly No No
Membership only available to certain groups including members of police, emergency services, health services, public services, and their families
Other accounts (listed by maximum interest rate)
Defence Force Credit Union
www.defcredit.com.au
3.60
Exit fee, interest credited annually
No Annually No $30
 
Commonwealth Bank
www.commbank.com.au
3.50
Interest credited annually
No Yearly No
 
Wagga Mutual Credit Union
www.waggamutual.com.au
3.50% plus 1% bonus (see other details)
Interest credited annually
No Yearly No No
Customers who get a homeloan from Wagga Mutual after completion of the four financial year term receive an additional 1% interest,
Hunter United Employees Credit Union (Hunter United)
www.hunterunited.com.au
3.45
$30 fee to close or transfer the account
No Quarterly No $30
Home loan application fee waived for applicants using their FHSA towards first home purchase
MyState Financial
www.mystate.com.au
3.25
$500 minimum starting balance
No Quarterly No No
Wyong Council Credit Union
www.wccu.com.au
0.00-3.00
No interest paid until balance reaches $1000
No Quarterly No $30
Credit union membership is only open to Wyong Council employees and their families.

Interest rates correct as at August 2009.

Table notes

  • NA Not applicable
  • Rates are variable unless otherwise indicated.
  • Our comparison includes most providers that were offering a First Home Saver Account in August 2009. Interest rates are variable, before tax and can change. They are in addition to the government's contribution.

FHSAs are also available from the following institutions which we haven't yet assessed:

  • Greater Building Society
  • IMB
  • Plenty Credit Co-operative
  • Police Association Credit Co-operative
  • Satisfac Direct Credit Union

CHOICE benchmark for fair accounts with high interest and low fees.

  • Matches RBA cash rate for the full account balance.
  • Fair and simple interest: we think a high interest rate should be paid for all account balances, so savers with small amounts get an equivalent benefit to those with larger savings. Accounts with tiered interest rates, where less interest is paid for smaller account balances, fail our benchmark.
  • No account keeping fee.
  • No switching fee.
  • No fee to make deposits.
  • No tiered interest rates.
  • No regular saving requirement to get for full interest rate.
  • No minimum starting balance or regular deposit amount. We think you should be able to start the account with a small amount and continue to make small contributions when you can afford them.
  • We also think the best accounts allow you to take a break from regular savings, while still paying interest on the full account balance.
  • Interest calculated daily and credited (compounded) monthly or quarterly on the full account balance (monthly is better). Some accounts accrue interest annually, leading to lower returns. And we think daily interest should apply to the full account balance, from the day deposits (including your savings and the government contribution) hit the account.

The legislation allows for two distinct types of FHSAs: deposit-style accounts, which are like a traditional bank savings account (see deposit accounts) and investment fund FHSAs.

No investment FHSAs have been launched yet, though Trust Company Superannuation Services Limited, regulated as a Registrable Superannuation Entity, is licensed to offer FHSAs. Investment style FHSAs are likely to more closely resemble managed funds or super funds than deposit accounts, and come with the associated risks. Providers may offer different options that have a range of risks and expected returns – for example, a ‘conservative’, ‘balanced’ or ‘growth’ option, just like your super fund. The value of such ‘market-linked’ investments can go up and down.

You might be comfortable with the risk in the expectation of better returns, particularly as FHSAs are a medium- to long-term investment. However, before choosing an investment FHSA pay particular attention to:

  • The investment strategy. Treat your FHSA like any other investment; find out where your money will be invested, including aspects such as the proportion in riskier ‘growth’ assets like shares and property, and in safer assets like deposits and fixed interest.
  • Returns may be uncertain. Your investment FHSA might lose money and leave you with a lower deposit than you’d have with a safer option. On the other hand, it might provide better returns. You need to check out the type of investment. If the account invests in shares and property funds, expect fluctuations. If share prices fall, the balance of your savings and even the government’s contribution would fall too. Investment FHSAs may also provide guaranteed or secure options.
  • Fees. Check the establishment fees, entry fees, annual management fees, running costs and exit fees. High fees take a chunk out of your returns. You might be charged a management fee of 1.5% of the full balance (not just the interest or growth) of your account every year. And with some (non-FHSA) managed funds, entry fees of up to 5% of every contribution consumers make is creamed off as an entry fee.
  • Are commissions paid to financial advisers? With non-FHSA managed funds, entry fees may be shared with the financial planner who recommended investing in the fund. We don’t know if the same commission arrangements will apply to investment FHSAs as none have been launched yet, but it’s worth watching out for.

The table below estimates what a First Home Saver Account will account will grow to, based on different savings amounts and a 4% interest rate (before tax) and other important assumptions. For a more detailed calculation, go to the ASIC calculator.

First Home Saver Account approximate growth assuming 4% average interest per annum

First Home Saver Account approximate growth assuming 4% average interest per annum
Your annual savings ($) 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
Year 1 1,204 2,408 3,612 4,816 6,020 7,054 8,088 9,122 10,156 11,190
Year 2 2,449 4,898 7,347 9,736 12,245 14,348 16,451 18,554 20,657 22,760
Year 3 3,736 7,472 11,209 14,945 18,681 21,890 25,098 28,307 31,516 34,724
Year 4 5,067 10,134 15,202 20,269 25,336 29,688 34,040 38,391 42,743 47,095
Year 5 6,444 12,887 19,331 25,774 32,218 37,751 43,285 48,819 54,352 59,886
Year 6 7,867 15,733 23,600 31,466 39,333 46,089 52,845 59,601 66,356 73,112
Year 7 9,338 18,676 28,014 37,352 46,690 54,710 62,729 70,749 (A) (A)
Year 8 10,860 21,719 32,579 43,438 54,298 63,624 72,950 (A) (A) (A)
Year 9 12,433 24,866 37,298 49,731 62,164 72,841 (A) (A) (A) (A)
Year 10 14,059 28,119 42,178 56,238 70,297 (A) (A) (A) (A) (A)
 

Assumptions 

  • Interest rates and your annual savings amount don't change over the period of your investment (4 years+).
  • All contributions you make are at the start of the year so they earn interest for the full year.
  • The government contribution is credited to the account at the end of the financial year and immediately begins to accrue interest in the next year.
  • Interest is calculated and compounded annually. Many institutions will compound interest monthly or quarterly, meaning the account earns more interest.

Table note

(A) The balance is capped at $75,000. Once the cap is reached, you can’t make any further contributions, however, interest and any outstanding government contribution will still be credited to the account. The amount of the cap is supposed to be increased in $5000 increments in line with inflation in future years.

Gavin, 22, is a recent graduate working in his first full-time job. He still lives with his parents in Melbourne but plans to soon move into rental accommodation.

Gavin opens a FHSA that pays an average 4% interest, and he deposits $200 from every monthly pay cheque into the account. His parents will match his contribution, which means the account will have $4,800 of personal savings and $816 of government contributions (17%) going in each year. After five years, assuming interest rates don’t change, Gavin’s account will be worth about $30,929. That’s made up of:

  • $24,000 of personal savings,
  • a government contribution of $4,114 and
  • net interest (after 15% tax) of $2,849.

That deposit represents less than 8% of the median house price (over $400,000) in Melbourne today. If house prices rise over the next five years, Gavin’s deposit would be worth a lot less than 8%. With the first home owner grant ($7000 from July 2009), the deposit would be closer to 10%. But even still, assuming a lender was prepared to offer him a home loan, he’d have to pay lender’s mortgage insurance.

Nevertheless, the FHSA has given a better return than if he’d saved $4800 per year in an online savings account with the same interest rate. Assuming Gavin’s marginal tax rate is 31.5% (the current rate for those earning between $34,001 and $80,000, including the Medicare levy) his online account would be worth about $26,000 after five years. The $4000 extra provided by the FHSA stem from the lower tax rate on interest and the government contributions.

Instead of closing the FHSA after five years, Gavin could continue contributing to it for several more. Assuming the same personal contributions, interest rates and government contributions, after seven years the account would be worth nearly $45,000. Add to that the first home buyer’s grant ($7000 in Victoria – check your state or territory via firsthome.gov.au) and Gavin’s deposit would be worth 11% of Melbourne’s median house price today. And if his income increases during the seven years, he’d probably be able to increase his contribution to the FHSA too, leaving him with a bigger account balance.

Are you eligible?

You must never have owned a home, be aged between 18 and 65 and have a tax file number.

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; the balance of your account will 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.

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.

FAQ

Can I open an account for my 18-year-old daughter to help her save for a deposit?

No, but if your daughter opens an account, you can contribute to it. If you manage to contribute $5000 each year, assuming an average return of 4% per annum, in ten years’ time the account would be worth over $70,000. And it’d be worth even more if your daughter contributes to the account too!

Can my partner and I both open an account and use the combined savings for a deposit?

Yes. As long as at least one of you satisfies the four year rule you can withdraw your money and combine the balance of your accounts to assist with your home purchase. I plan to spend a year working and travelling abroad.

Can I take a break from contributions?

Yes. Remember, the rules are that you must contribute at least $1000 in each of four financial years, but they don’t have to be consecutive years. You can keep the account open while you’re outside Australia. You can continue to contribute to it if you like, but you don’t have to. However, in years that you’re not an Australian resident for tax purposes, the government won’t pay a co-contribution. And note that some banks, may not pay much interest in months when you don’t make a contribution.

Can I salary sacrifice into a FHSA?

No, all contributions must be from after-tax income.

What if I open a FHSA, but find the perfect home in two years and want to use money in the FHSA for a deposit?

This is a really important question. You won’t be able to withdraw your money from the FHSA because four financial years have not elapsed. If you buy the property using money from other sources and you live in that property, your FHSA will be closed and its balance will be transferred to your super fund.

If I own an investment property, am I still eligible for the first home owner grant?

Check the relevant information for your state or territory via First home owner grant site. In Victoria, for example, you’re ineligible for the grant if you had an interest in a residential property before July 2000 (even if you didn't live in it). But if you owned an investment property after July 2000, and lived in it for less than six continuous months, you’re still eligible for the grant.

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