First home saver accounts

A new government scheme provides incentives for new home buyers, but watch for traps.
 
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06.Worked example

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.

 

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