Saving for a first home, thanks to a silver spoon

Saving for a first home, thanks to a silver spoon
Jonathan ChancellorJune 7, 2011

The much-vaunted first home saver account scheme has finally gained some traction, with a 21% jump in accounts over the past year.

There are now 27,400 account holders holding $173 million in savings that form the basis of their future home deposits.

Smart money might consider opening an account with $5500 by June 30, as it will immediately qualify for the maximum $935 Federal Government contribution this financial year.

Financial advisors have been making the suggestion as a worthy means of minimising the time the deposit sits in the bank, and maximising the government payout.

It will be necessary to maintain the account, with further, say, $5500 deposits, for the full financial years of 2011-2012 and 2012-2013.

Then, on making one final $5500 payment into the account on July 1, 2013, the total funds can be immediately withdrawn, and the account closed with the final Government maximum contribution for the 2013-2014 year.

Participants will walk away with the makings of a deposit of $27,300, of which about $3740 will be from the Government, accumulated in two years and two days.

The scenario is based on calculations from infochoice.com.au, Australia’s leading finance comparison site. The calculations are based on the government making a contribution equal to 17% of personal contributions for each financial year, up to a maximum of $935 based on annual deposits of $5500 or more.

The deposit will have been topped up with interest calculated at 5.5% per annum, which is the current rate available with some of the providers of first-home savers accounts. The net benefit depends in part on the saver’s marginal tax rate; the higher it is the better off the person will be, but an ordinary bank account would have to get 15% interest to beat the benefits of the first-home savers accounts.

The “four years is really only two years” scheme, as outlined, ideally suits indolent and expectant young people relying on the largesse of benevolent family patrons, who don’t necessarily see an imperative to buy their first home until spring of 2013 at the earliest.

Perhaps they could travel overseas in the meantime.

Of course this doesn’t quite match the purpose of the scheme, which was to encourage first-home buyers to save in a disciplined environment, which then helped with applications to banks.

But this well-intentioned scheme hasn’t matched the Federal Government’s initial high hopes of $4 billion under deposit by 2012. The typical account currently has $6,300, the Australian Prudential Regulation Authority said.

The initial projections were of 220,000 accounts opened in 2009, and 730,000 by 2012. The scheme had a very slow start, with just $41 million deposited after its first nine months. As at June 2009 there were just 13,946 First Home Saver accounts. This jumped to 22,600 as at June 2010, and to currently about 27,400.

It dates back to an election commitment by then aspiring Prime Minister Kevin Rudd, with the Government offering to contribute up to $850 for every $5000 deposited each financial year. This amount has now been adjusted to $935 for every $5500 or more.

Anyone over 18 and under 65 who has not previously purchased a home in which to live can have an account with an indexed $80,000 balance limit.

Only 18 financial institutions offer the accounts, and most of them are credit unions. Just two of the four big banks, the ANZ and Commonwealth, offer the accounts.

One of the main reasons why the scheme's uptake was woefully slow was its introduction coincided with the frenzy accompanying the first home owner grant boost, one of the overdone stimulatory measures during the global financial crisis.

The first-home saver scheme became swamped by the first home owner grant bonus.

There are tight rules regarding withdrawals, which are tax-free but can only be used to go to the purchase of a first home.

Account holders who change their minds about buying a house can transfer the balance of the account into  superannuation. 

The account holder must live in the home for at least six months as his or her main residence following the purchase of the property after the withdrawal of the funds.

First home saver accounts are an individual account, not a joint account.

Account holders don't have to be Australian residents or living in Australia to open or contribute to a first-home saver account, but do have to be Australian residents for income tax purposes for at least part of the financial year to receive the government contribution.

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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