Earn 12.84% interest saving for your first home

Earn 12.84% interest saving for your first home

August 31, 2009

If you thought saving a deposit for your first home loan will take longer than four years, than compare First Home Saver Accounts and you may find yourself mowing your own lawn much sooner than you thought. Jack Han investigates.

Saving for a home loan is the hardest step to owning your first home, and with the government boosts reducing by October and ending in December, many first home buyers will miss out on the grants.

However, the introduction of First Home Saver Accounts can boost your savings goal to owning your first home.

Lending criteria has tightened this year and most institutions will expect a proven genuine savings of 5 percent of a mortgage, which means you need to show regular savings for your deposit stored away for at least six months. This does not include government contributions such as the First Home Owners Grant.

On top of this, lenders generally require a 10 percent deposit, as well as funds for a number of upfront fees such as application fees and lenders mortgage insurance.

So for the average home loan of $270,000, a first home buyer will need to have saved at least $40,000 for a 10 percent deposit.

First Home Saver Accounts are the answer to many Australians first home savings goal. However, with strict conditions they may not appeal to everyone.

These accounts can speed up your savings process by combining a high interest rate, a low 15 percent tax on interest earnings and bonus government contributions to maximise your savings potential every year.

They are only for Australians between 18 and 65 years old who plan to buy their first home in four years time or more. For savings of up to $5,000 per financial year, the government will contribute 17 percent each year, which is up to $850.

Here is the catch: the only way you can make a withdrawal is if you directly use it as a deposit to buy or build your new home after four years. Otherwise, you can transfer it into your superannuation fund.

Let’s compare the benefits of a First Home Saver Account to today’s highest online savings account.

Max wants to save at least $25,000 in four years towards purchasing his first home. He contributes $5,000 per year into today’s best online savings account, UBank’s USaver account with an interest rate of 5.11 percent p.a.

After four years, Max would not have reached his goal as he would have saved about $22,233 including total interest of about $2,233.

However, if Max opens an ME Bank First Home Saver Account, with an impressive 6 percent p.a. interest rate, after four years his savings would total about $26,381 which would include $3,400 of government contributions.

His total interest earned would be $4,148 more than the UBank savings account as his effective rate would be 12.84 percent p.a. However, if he needed to withdraw some funds in an emergency, he would only have the flexibility with the UBank account.

First Home Saver Accounts are changing the way Australians save for a first home. If you’re determined to reach your first home loan deposit in 4 years or longer, comparing savings accounts online can add thousands of dollars to your investment and turn your first home dream into reality.

 

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Learn more about savings accounts

Should I open multiple savings accounts with UBank?

UBank offers customers an opportunity to make the most of their savings by opening multiple savings accounts. Having multiple savings accounts with UBank may be ideal for savers tracking different goals in separate accounts. 

It’s important to note that to earn bonus interest, you will still need to meet the conditions of the UBank savings account every month. If you don’t make these deposits, you will receive the standard interest rate, which is typically lower. 

Keep in mind that you won’t earn bonus interest on your UBank savings account in the month an account is opened and if you open multiple savings accounts with UBank, you'll start earning any bonus interest the following month. 

It's also not yet known how long the special interest rate will hang around for, so please check with your bank for more information. 

Can you have multiple ING savings accounts?

Yes, you can open up to nine accounts with ING at any particular time. If you’re saving money for various goals, such as buying a car or taking a holiday, you can name each of your multiple ING savings accounts differently.

To get a Savings Maximiser account, you’ll need to deposit more than $1000 every month and make at least five additional purchases. If you also want to grow your savings, from 1st March 2021, you can earn up to 1.35 per cent per annum variable interest on one account with a balance of up to $100,000 when you also maintain an Orange Everyday account.

With ING, multiple savings accounts can help keep track of all your savings goals. All the accounts offer flexible withdrawals where you can withdraw as low or as high as you want without impacting your earning interest rate. However, you can only earn the bonus interest on one account. To apply for a Savings Maximiser account, you can visit ingdirect.com.au.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Do banks run credit checks on savings accounts?

When you apply to open a new savings account, some providers may conduct a credit check, meaning that they will ask a credit bureau for your credit history. This isn’t always the case on savings accounts though and depends on the provider, as you aren’t borrowing money. 

As you are opening a savings account and not borrowing funds, this credit check is considered a soft inquiry and should not affect your credit score. If the bank has run the credit check, you can often still open a savings account even if you have a poor score, provided you meet other requirements.