Deciding what account to use when saving for a home is a decision no potential first home buyers should take lightly.
Saving for your first home is a challenging task for many, though the Australian Government is offering first home owner grants to assist in buying or building your first home, you can also set up a first home buyers savings account which is designed specifically to help you save for your first home, while also offering government contributions and tax breaks on your savings. Read on to learn more about with our general guide on First Home Saver Accounts.
So, what is a First Home Saver Account?
A First Home Saver Account is 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. First home buyers are run through selected banks, credit unions and building societies and others that offer the accounts. These accounts come with stringent conditions which partly explains the low uptake.
These contributions are made in return for meeting some criteria, including:
- Depositing at least $1,000 per financial year for at least four financial years before you can access your money. These years don’t need to be consecutive.
- Using the money only to purchase a home. Failure to use the funds in the account for your home means they’ll be transferred to your super account to be accessed when you retire or meet a condition for release.
There are also some other features of this account you should be aware of, such as:
- The maximum amount you can hold in an FHSA is $90,000, but this will be indexed in future.
- If you purchase a home before the four years is up, you can still put the money in your FHSA towards your home, but you’ll still need to wait the four years until you can do this.
- You’re only charged a tax rate of 15% on the interest earned in an FHSA.
- Government will contribute 17% on the first $6,000 deposited each financial year. This equates to $1,020 of free money
- Interest is only taxed at 15%, instead of your marginal income tax rate
- Family, employers and friends can all contribute after tax income to your FHSA
- Maximum government contribution and balance cap are periodically increased (indexed upwards)
- Savings are locked in your account for a minimum of four financials years. You have to deposit at least $1000 over four financial years and use the balance for a deposit on a house.
- Interest rate is usually lower than online savings accounts
- Max balance capped at $90,000. This is a 20% deposit on a $450,000 property
- Joint accounts aren’t permitted
- Low availability of FHSA providers
Features and Benefits of a First Home Buyers Savings Account
A first home saver account is similar to a term deposit account in that you are required to leave your funds in the account for a certain length of time, and when the term ends, you must withdraw the entire amount and close the account.
Other features which can benefit first home buyers:
- Government contributions and interest earned are tax free and you don't have to report them on your tax return; the earnings from your first home buyers savings account are still taxed at 15%, but this tax is paid by the account provider. Any government contributions and interest earned won't affect any pensions you receive from Centrelink either.
- When you have held your first home buyers savings account for four financial years, you can withdraw the funds, tax free.
- You can 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 must apply for the grant in a separate application.
- Contributions can only be made to your first home saver account after tax, meaning you can't salary sacrifice some of your wages into your account.
- Family members or friends can contribute funds to your first home buyers savings account too, to help you along.
- You have 14 day cooling off period which allows you to withdraw your personal contributions and close the account if you change your mind, while still being eligible to open a new first home saver account in the future.
- If you close the account outside of the 14 day cooling off period, savers over 60 years old will receive their funds back, while those under 60 will have 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 are 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
Institutions which no longer offer FHSA’s to new customers:
- Beyond Bank Australia
- Defence Bank
- MyState Financial
How the savings stack up: Online savings account vs First Home Saver Account
Online Savings Account
|interest rate 4.80%||0.048|
First Home Saver Account
|interest rate 3.50%||0.035|
|Year||Yearly deposits||Govt. Bonus||Interest||Tax||
For this calculation we have made some assumptions of
- Taxable income $50k
- One annual contribution of $6k
- Marginal tax rate is 32.5%
- FHSA taxed at 15%
FHSA earns $4,097 more than an online saver account over four years
Changes were made on 25th May 2011 to allow the purchase of a property without the minimum of four financial years of deposits (if four financial years have elapsed). There is also now an allowance for the balance of a FHSA to be contributed to a mortgage in a lump sum rather than reverting to a super balance if not used for a deposit.
Although these changes do increase flexibility somewhat, and are welcomed, not being able to use the balance of a FHSA for a deposit on a first home within four financial years is a huge (and at times hurtful) barrier for consumers. It seems that plenty of consumers lock into these accounts without fully knowing these conditions and are shocked when they realise they can’t use their savings in this account when they decide to purchase their first home.
First home buyers bought 429,000 homes from June 2007 to June 2010 according to the most recent ABS statistics. FHSAs totalled 35,200 as of March 2012 according to APRA - a pretty measly representation of Australia’s future first home buyers.
Is a First Home Saver Account for you?
Piling your savings into a First Home Saver Account can provide a big boost towards your deposit. But if you don’t meet the account rules, you will end up red-faced and unable to use the balance as a deposit on your first home.
Who is Eligible for a First Home Buyers Savings Account?
Of course you must have not already owned a home in Australia to be eligible to receive the benefits of a first home buyers savings account, but there are several other criteria too:
- You must be over 18 and under 65 years old.
- You must have a tax file number and this must be included in your application.
- You may not have owned a home in Australia or Norfolk Island which was your main residence.
- You cannot have previously opened a first home buyers savings account.
- You may transfer the funds from one first home saver account to another first home saver account.
- If the purchase or construction of your first home did not eventuate after you closed your first home saver account, you may open a new first home saver account within six months.
- There is a 14 day cooling off period in which you can close the account and still be eligible to open a new first home saver account.
- You may only open one first home buyers savings account.
- A first home saver account is an individual account, and cannot be opened in joint names.
How to Apply for a First Home Saver Account
Not all financial institutions will offer a first home saver account, and not all high interest savings accounts can be used as a first home saver account, so make sure you are opening an account designated for first home buyers, to ensure you are eligible for the government contributions and tax incentives. Once you have compared the first home saver accounts on offer, choose one with a provider you are happy with, and one which offers the features you need and want, not all first home saver accounts are the same and some will have different fee structures and offer different interest rates.
The FHSA VS HISA debate
With the conditions explained above, many of you may wonder if an FHSA would really suit you, and for some, it won’t. There are a few examples where a regular High Interest Savings Account (HISA) may serve you better than an FHSA.
- Time requirement. You may want the flexibility of an account where you’re free to use your money to buy a home in less than four financial years.
- You want the ability to access your money in an emergency. This is self-explanatory - you may want an account where you can get your money in the event that you need it for sudden, unexpected expenses.
- 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, but your funds are tied up in an FHSA, then a HISA might be the way to go.
Julia wants to save up for a deposit for her first home and wants to know whether a high interest savings account will suit her financial situation better, or a first home saver account. She knows she will be able to deposit $500 per month, meaning she will be eligible for the maximum standard variable rate for the RAMS Saver account and she can get maximal government contributions.
She is also a member of an eligible superfund to apply for the ME Bank FHSA. After doing her calculations, she decides that the extra $942 she’ll receive from the first home saver account is worth the inflexibility of the account as she doesn’t plan to buy her first home until 2018.
|ME Bank First home saver account||RAMS Saver Account|
|Maximum standard variable rate||N/a||4.51%|
|Total earned for the year||$1218||$276|
*Rates are current as of 27/08/13. This example is general and does not take into your account your personal situation.
High interest savings accounts have a number of basic benefits which make them a useful tool when saving for a home.
- Think before you spend. Because most savings accounts require approximately two to three days to transfer funds to your transaction account, you have a buffer to stop you from making any impulse purchases using your savings.
- High interest. A HISA might not provide the financial benefits an FHSA does, but many still offer competitive interest rates. Earning interest is one way to get closer to your goal of owning a home.
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.