SCOTT FRANCIS – 30 SEPTEMBER 2013
Summary: First home saver accounts haven’t been heavily marketed, but they are gaining some traction among people saving towards their first home. They enable savers to deposit funds into an account and receive a government contribution, and only pay tax on the savings at 15%. But there are some catches that savers should be aware of.
Key take-out: The accounts provide a way for savers to accumulate a house deposit over time, with government support, and also allow for other family members to make contributions on their behalf.
It seems more Australians are discovering the benefits of first home saver accounts but generally speaking, few still know about them.
Introduced by the federal government during the global financial crisis as a measure to support first home buyers, the value of holdings in these special savings accounts has surged by more than $100 million in less than 12 months.
Essentially, first home saver accounts are a government supported savings strategy, which provide a combination of co-contribution benefits and tax savings to eligible accountholders.
The main benefit of the first home saver accounts is that for every $1 a saver deposits, the government will add an extra 17%. But the benefits of the accounts go beyond just the 17% bonus, as they also offer a tax-effective savings environment (with a 15% tax rate). This helps to build the savings habit and gives a way for older generations to help their children, grandchildren and great grandchildren toward the goal of home ownership.
It is worth starting by looking in more detail at how these accounts work.
The details of the scheme
The accounts are available to people who are Australian residents for tax purposes, over the age of 18 and up to 65 years of age, and saving for their first home.
Each year the first $6,000 deposited into the account will be added to by a 17% government contribution. If someone makes a $6,000 deposit, the government will add $1,020 to the account. Deposits to the account can be made either by the person saving for the account, or someone else – providing the opportunity for family to support someone saving towards their first home.
Before the funds are available to be accessed, at least $1,000 a year over four financial years needs to be deposited. It is important to understand the timing requirements here. If the first contribution is made in June of one financial year, and then again early in the next financial year, you can be half way to the four-year qualification relatively quickly.
The ‘four financial year’ requirement does not need the years to be consecutive. Someone who is uncertain about whether they want to purchase a house in the future might start by depositing $1,000 over a couple of financial years, so that if buying a house becomes more important in the future the first two deposits for the minimum four have already been made.
The key benefit is the 17% government contribution, however another tax benefit is that earnings on a first home saver account are taxed at the concessional tax rate of 15%. Withdrawals are then tax free.
There is a cap of $90,000 on an account balance, and once the account reaches the maximum level only interest and earnings can increase the value of the account.
Plan B – Not buying a house
If a first home saver account is started, and does not end up with someone buying their first home, the money is transferred into superannuation.
This is an important scenario to think about. Someone saving for a first home in their 20s is a long way from being able to access their superannuation, with many financial goals standing between them and their superannuation. So if they don’t end up using the funds from their first home saver account, they effectively lose access to it for 30 years or more.
An example of an account
Over the past 12 months there has been an increase in both the number of first home saver accounts, and the value of money held in the accounts. That said, not all financial institutions offer them. Click here to see a list of institutions offering the accounts.
Members Equity has provided these accounts over time, and they have generally been among the most attractive. Its current first home saver accounts are offering a 3.25% interest rate return with no fees.
A few subtleties of the accounts
There are a few more complex situations that are worth knowing about if you are considering a first home saver account:
- If you have purchased an investment property and have never lived in it, then you are still eligible for a first home saver account.
- If your partner has owned a property that they have lived in (making them ineligible for a first home saver account), you may still be eligible if you plan to purchase a home to live in.
- If you purchase a home before the four-year qualifying period is up, you are no longer able to make any contributions to the account. However, after you have held the account for four financial years, you can use the proceeds of the account toward your mortgage.
- If you are purchasing a property with another individual who also has a first home saver account, only one accountholder needs to meet the four-year requirement. If one person meets this, then the other individual can also withdraw their funds. This provides an opportunity for a couple to ‘top up’ their deposit where one person has already completed the qualifying period, with the second opening an account and adding some contributions without having to complete the four years.
Owning a home is a key financial goal for many people – and first home saver accounts are worth considering as a part of this pursuit.
They also offer the opportunity for older generations to support those saving for their first home. With free money from the government (17% contributions) and low tax rates, the key ‘risk’ to understand is that when the money is not used to purchase a home it is contributed to superannuation, which may mean no access to the money for many years.
Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor.