Housing's fast track is getting faster - Eureka Report article
Housing’s fast track is getting faster
PORTFOLIO POINT: Easing restrictions on the first-home saver’s account makes it a flexible wealth-creation strategy.
Make four years become two
The biggest hurdle to many people using a first-home savers account has been the problem of having to make contributions of at least $1000 in four financial years.
Perhaps this is not as onerous as it seems, especially at this time of year.
It would be possible to make contributions in June and again in July this year to mean that the first two contributions are made within two months of opening the account. Further contributions in July 2011 and July 2012 bring up the four years of contributions. The timing would be June 2010, July 2010, July 2011 and July 2012.
The proposed increased flexibility means that once the account is opened, effectively a house can be bought at any time in the future and the benefits of the first-home saver account enjoyed.
It will still make sense to keep making contributions to the account after the purchase, because the account will still attract the 17% government contribution and can be paid to the mortgage once four years of $1000 contributions have been received.
This is more effective than paying extra to the mortgage. An extra $1000 paid to a mortgage at 8% returns an effective $320 over four years. A $1000 contribution to a first-home saver account over four years will receive an extra $170 from the government, and $250 in earnings after tax. This is an effective return of $420.
A more aggressive use of the strategy might see joint home owners each have accounts that they build to the $75,000 limit, that they then tip both into their mortgage. This would take advantage of the greater return from investing in a first-home saver account, as compared to making additional mortgage repayments.
Indeed, the most aggressive use of the strategy might be for a couple to set up two first-home savers accounts, buy a home, and use a line of credit to withdraw from the mortgage if the house increases in value, using this money make contributions to the home savers accounts – although we should note that the legislation might prohibit this type of activity.
Another benefit of the flexibility is that if you were to buy a home in the first couple of years of the account, you could also receive the $7000 first-home owner’s grant before it is (ultimately) phased out. People often worry about losing out on this scheme – this way they can lock in the benefits of both schemes.
Helping younger generations
For parents, grandparents and concerned adults generally, the first-home saver accounts present a way to assist the younger generation into home ownership. Given the concern that many people have about their children and grandchildren being able to afford a house, opening a first-home saver account in their name is a way to assist. By making contributions of $1000 a year into the accounts they will provide:
The bottom line
Using first-home saver accounts just became a much better strategy. The flexibility to buy a house at any stage once the account is opened makes in an almost compulsory strategy now – the 17% government contributions make it more attractive than paying extra to a mortgage, and you can add the money from your first-home saver account to your mortgage.
There are many personal finance strategies that are so effective that they should be compulsory including: