The financial incentive most first buyers overlook

The financial incentive most first buyers overlook

At a time when the government has reduced the amount of cash support being given to first home buyers – either by reducing grants or limiting stamp duty concessions – there’s one program aimed at supporting saving that’s gone mostly unnoticed.

The First Home Savers Account Scheme was introduced by the Rudd Government in 2008, giving account users an extra 17 percent bonus for the first $5000 contributed by the saver each year.

When the government launched the scheme, it predicted 750,000 Aussies would use it save for their first home. Unfortunately, those numbers have been way, way off.

New figures released by the Australian Prudential Regulation Authority show up until December 39,000 accounts had been opened – about 19 times fewer than initially predicted. The total balance of these accounts has grown to $401 million and the average balance is $10,282.

How the major banks can help

Strict rules and ignorance have been blamed for the low uptake of first home savers accounts.

Michelle Hutchison, spokeswoman for RateCity said that while there’s a number of things government could look at to improve the scheme – most notably around reducing the paperwork burden – there’s also an opportunity for the major banks to come to the party.

“Right now only 10 institutions offer these accounts – and none of the big four banks,” she said.

“Currently around 92 percent of Aussies bank with one of these institutions, so if they’re not offering first home saver accounts, it’s no surprise that many potential buyers haven’t heard of them and so don’t use them.”

Institutions could benefit from offering these accounts, she said, not just in terms of the good PR that comes with supporting first home buyers.

“These accounts could help institutions market home loans to prospective customers. Savers aren’t likely to switch accounts and their bank will have the inside track to offer a home loan to them when they are ready to buy,” she said.

The benefits and conditions explained

As the name suggests, these accounts are open to people saving for their first home. They have two main benefits. First, the more money you save, the more the government will contribute – up to a limit each year.

Also, the interest you earn on the account is only taxed at a rate of 15 percent, according to the Australian Securities and Investment Commission.

There are a number of conditions that must be met to earn the bonus interest.

First, you must be an Australian resident aged 18 to 65 years.

You’ll need to save at least $1000 each year over at least four financial years before you can withdraw the money. The maximum account balance is capped at $90,000 (indexed) and after your savings reach this level, only interest and earnings can be added to the balance.

The money has to be used for your first home. If it’s not, it is added to your superannuation and you can’t access it until you are retired or can meet another condition of release. If you buy your first home before the four year period is up, you can withdraw the money in your account at the end of the four years to put towards your mortgage, but you won’t be able to make further deposits once you’ve purchased your property.

Not all first home saver accounts are the same so choose the account provider you want to have your account with read their product disclosure statement to find out more.

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Learn more about home loans

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.

How do I save for a mortgage when renting?

Saving for a deposit to secure a mortgage when renting is challenging but it can be done with time and patience. If you’re on a single income it can be even more difficult but this shouldn’t discourage you from buying your own home.

To save for a deposit, plan out a monthly budget and put it in a prominent position so it acts as a daily reminder of your ultimate goal. In your budget, set aside an amount of money each week to go into a savings account so you can start building up the ‘0’s’ in your account.  There are a range of online savings accounts that offer reasonable interest, although some will only off you high rates for the first few months so be wary of this.

If you aren’t able to save a large deposit, you can consider ways of entering the market that require small or no deposits. This can include getting a parent to act as guarantor for your home loan or entering the market with an interest only loan.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How does an offset account work?

An offset account functions as a transaction account that is linked to your home loan. The balance of this account is offset daily against the loan amount and reduces the amount of principal that you pay interest on.

By using an offset account it’s possible to reduce the length of your loan and the total amount of interest payed by thousands of dollars. 

Example: If you have a mortgage of $500,000 but holding an offset account with $50,000, you will only pay interest on $450,000 rather then $500,000.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.