Choose the right savings account and get into your home earlier
Important changes to the FHSA
As mentioned above, the FHSA has been abolished. Those who already have an FHSA will continue to receive the government bonuses for the 2013-14 financial year and will receive tax and social security concessions for the 2014-15 income years. There are also some other important points:
- Any new accounts opened after 7:30 pm 13th May 2014 won't be eligible to access government contributions or tax savings.
- Withdrawal restrictions will be abolished from 1 July 2015
- From 1 July 2015 FHSAs will be treated like any other savings account
What was a First Home Saver Account?
The First Home Saver Account was an account backed by a Federal Government scheme put in place late 2008 to help first time buyers save for a home by giving government contributions and low taxes for savings towards a home. FHSAs were only offered through selected banks, credit unions and building societies and others that offered the accounts. These accounts came with stringent conditions which partly explained the low uptake. They offered contributions which were made in return for meeting criteria including:
- Depositing at least $1,000 per financial year for at least four financial years before you could access your money. These years didn't need to be consecutive.
- Using the money only to purchase a home. Failure to use the funds in the account for your home meant they would be transferred to your super account to be accessed when you retire or meet a condition for release.
There were also other features of this account Australians had to be weary of, including:
- The maximum amount you could hold in an FHSA was $90,000, but this was indexed.
- If you purchased a home before the four years was up, you could still put the money in your FHSA towards your home, but you'd still need to wait the four years until you could do this.
- Account holders were only charged a tax rate of 15% on the interest earned in an FHSA.
- Government contributed 17% of the first $6,000 deposited each financial year. This equated to $1,020 of free money
- Interest was only taxed at 15%, instead of the marginal income tax rate
- Family, employers and friends could all contribute after tax income to your FHSA
- Maximum government contribution and balance caps were periodically increased (indexed upwards)
- Savings were locked in your account for a minimum of four financial years. You'd have to deposit at least $1000 over four financial years and use the balance for a deposit on a house.
- Interest rate was usually lower than online savings accounts
- Max balance was capped at $90,000. This is a 20% deposit on a $450,000 property
- Joint accounts weren’t permitted
- Low availability of FHSA providers
Features and Benefits of the First Home Buyers Savings Account
A first home saver account is similar to a term deposit account in that you were required to leave your funds in the account for a certain length of time, and when the term ended, you had to withdraw the entire amount and close the account. Other features which benefited first home buyers:
- Government contributions and interest earned were tax free and you didn't have to report them on your tax return; the earnings from your first home buyers savings account were still taxed at 15%, but this tax was paid by the account provider. Any government contributions and interest earned didn't affect any pensions you received from Centrelink either.
- You could make personal contributions at any time from your wages by setting up a regular transfer, or through bulk deposits from your tax refund or money from an inheritance.
- You could still be eligible for the first home owner grant, but you had to apply for the grant in a separate application.
- Family members or friends could contribute funds to your first home buyers savings account too to help you along.
- You had a 14 day cooling off period which allowed you to withdraw your personal contributions and close the account if you changed your mind, while still being eligible to open a new first home saver account in the future.
- If you closed the account outside of the 14 day cooling off period, savers over 60 years old received their funds back, while those under 60 had the funds transferred to their nominated superannuation account.
- The Australian government will make a 17% contribution on the first $6,000 you deposit each year. This means that if you deposit $6,000 in one financial year, you will receive $1,020 from the government.
- The financial institution offering the account will also offer you a high interest rate, generally higher than their standard high interest savings account rates.
First Home Savings Accounts were available at:
- Credit Union SA
- Hume Building Society
- Hunter United Employees Credit Union
- ME Bank
- Police Bank
- Police Credit
- Railways Credit Union
- Teachers Mutual Bank
- Victoria Teachers Mutual Bank
- Wyong Shire Credit Union
Using a high interest savings account to save a deposit
High interest savings accounts (HISAs) and term deposits can be used to save a deposit in the place of FHSAs. A high interest savings account has a number of benefits when compared to a FHSA, including:
- Time requirement. High interest savings accounts have no time requirement to be able to access your funds unless the account is a notice saver. This means you can save for any period of time, and get access to your funds as soon as you find a property and secure a home loan.
- Bonus interest conditions. Some HISAs require you to make a minimum deposit each month or make no withdrawals to earn a high interest rate. This can encourage you to save and not use your funds for other purposes.
- You want the ability to access your money in an emergency. Along the way to your goal of owning a home you may run into emergencies where you need access to your savings. A high interest savings account allows you to get access to your funds without any significant delay - if your transaction account is linked to it you might be able to get access to your funds instantly.
- You want to be able to use your money for a different investment. A lot can change in four years, including your investment preferences. If you want to invest in shares rather than property for example, funds in your HISA can still be used.
Julia is saving up for her first home. After some research she sets herself a target of $40,000 to be read to purchase a home in two years, and starts researching accounts. Because she's starting with $0, she can't open a term deposit as she has no money to invest, so she opts for a high interest savings account.
There are a number of different accounts available, including notice savers, high interest savings accounts with bonus interest for the first few months of opening an account and high interest savings accounts with ongoing bonus interest given in exchange for regular deposits.
Julia opts for a high interest savings account which rewards her with bonus interest in return for making at least $200 in deposits each month. This encourages her to save, as failing to put money into her account will mean she won't interest for the month.
Julia's account has an interest rate of 4%, so she uses a savings calculator and works out that she'll need to save a minimum of $1,600 per month to reach her target of $40,000 in two years.
Picking the right HISA
Selecting the right savings account has a number of steps which are best gone into in depth, but here are a few quick tips to keep in mind.
- Don’t pay fees. Many competitive savings accounts have no bank fees, so don’t get sucked into paying bank fees for an account because the advertising tells you it’s special.
- Take advantage of bonus interest. Many HISAs today offer a bonus interest rate for a short period of time (usually a number of months). When this bonus interest rate ends, move your savings into a new HISA account from another bank and take advantage of their bonus interest rates. There’s no fees associated with this, and no limits to the number of HISAs you can have.
Realising your dream to own a home and reach financial independence can be that much easier with the right bank account backing you up. Start comparing today.
To compare the high interest savings accounts which can be used as first home saver accounts, view the Savings Account Finder™ comparison tables here, and follow our secure links to find out more about each providers' accounts and services.