Coming soon: First home saver accounts

By Jackie Pearson
23 September 2008

Nineteen institutions have already registered their intention to offer new First Home Saver Accounts, according to the Australian Prudential Regulation Authority (APRA), reports Jackie Pearson.

The new accounts are a Federal Government initiative designed to help first-time home buyers save for a deposit. They feature government co-contributions and a lower tax rate on interest and earnings.

Which institutions are offering?
Two of the biggest banks, the ANZ and Commonwealth have indicated that they intend to offer the new First Home Saver Accounts which, under Commonwealth Government legislation, can commence operation from 1 October. Laiki Bank and the AMP are also set to introduce the accounts.

A string of smaller institutions, predominantly credit unions, have also signed up to offer these new products. Some of the Authorised Deposit Taking Institutions (ADIs) which have put their hands up to start offering the accounts include Defence Force CU, Laiki Bank and MECU.*

What are the pros and cons?
Luke Lawler, policy adviser for Abacus Australian Mutuals, the industry association representing credit unions, friendly societies and building societies, says the accounts are “the most significant new financial product since the introduction of compulsory superannuation.

“Anyone who is serious about buying a house is going to be attracted by a guaranteed 17% return in the form of government co-contributions and a low amount of tax on returns,” says Lawler.

“There may not be many 100% home loan products available by the end of the credit crunch so in the future you are going to need a deposit in order to get a mortgage,” he says.

The trade-off, according to Lawler, is flexibility. Once the money is in the account you can’t get it out again other than to purchase a home or transfer it to your superannuation.

He expects some credit unions, friendly societies and building societies to have their accounts ready by 1 October but says they take time to launch because of complicated record-keeping and reporting requirements.

According to the Australian Bankers’ Association, the list of organisations with FHSAs in the pipeline is growing by the day. They can also be offered by superannuation funds and licensed fund managers but none has notified APRA that it intends to offer an account at this stage.

What’s on offer?
ANZ reports that its deposit-style First home Saver Account is ready to go and will be available at ANZ from 1 October.

“In addition to meeting government requirements for these accounts the ANZ First Home Saver Account provides a further incentive for first home buyers to save by paying bonus tiered interest when they meet a minimum deposit threshold per month,” an ANZ spokesperson reports.

“It will have a 0.01% base rate plus 6.99%bonus interest for deposits of $10 or more per month.”
For each $5000 (indexed) of individual contributions you make each year, the government will co-contribute 17%. That means the government will deposit $850 per year if you manage to save $5000.

How much can you save?
According to the ANZ if you save $100 a week for four years, your savings could grow to around $27,000 after government contributions and interest based on an account earning 5% interest after tax.

The maximum amount you can accrue in one of these accounts has been capped at $75,000. Interest will be taxed at 15% and withdrawals will be tax-free provided they are used to purchase a first home to live in.

To be eligible to open an account you have to be aged 18 or over and under 65 and you must not have previously purchased or built a home. Contributions have to be from after-tax income.
There’s no minimum annual deposit and the account can stay open for as long as necessary (it must be closed when you turn 65). But in order to withdraw your funds you’ll need to be able to make a minimum of $1000 in personal contributions per year for at least four years (they don’t have to be consecutive).

If you change your mind about purchasing a house you can close the account at any time but you will have to transfer the entire balance into superannuation.

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*For a full list of participating institutions visit APRA.