October 1 marks the introduction of First Home Saver Accounts, a Rudd Government initiative to help first home buyers save for their purchase. FHSAs are an enhanced account, with restrictions, that will help young people lock away the money they need for a home deposit, while earning a healthy return on it. In brief:
- For every $1 deposited, the government will contribute 17c (up to $850 per year on $5000 deposited).
- Banks pay interest on the accounts – some up to 7% per annum.
- Interest earned is taxed at 15%, and deducted directly by the bank (less hassle).
- Money can’t be withdrawn until $1,000 has been contributed in each of four separate financial years (eg no earlier than July 2012).
- Anybody between 18 and 60, who has never lived in house that they owned, can apply.
I created a spreadsheet projecting various investments in one of these accounts, over the four year minimum: First Home Saver Accounts projection
On the sheet “$5k pa decreasing int rate”, one can see that saving an investment of $5,000 per annum could potentially mature by 25-30%, paying out around $25,000 on a $20,000 investment. That’s a few thousand dollars more than what you’d get on a similar term deposit over the same period. (Of course, a term deposit gives you more flexibility – you could spend it on something other than a house.)
On the sheet “Decrease rate, increase deposit”, one can see the effect of gradually raising yearly deposits from $10k to $16k (for instance, when a young person is receiving annual pay rises). This is some serious saving. But the payoff is an extra $10,000 towards a house, or double that for a couple with an account each.
The following graph demonstrates the growth in three of the hypothetical accounts in my models:
First Home Saver account balances (4 years)
Of course, as CHOICE has revealed, not all accounts are equal. Some pay less than the cash rate for deposits, while others vary the interest rate based on monthly deposit amounts. But the correct account could be great value for people who are willing to stash their money away for a longer term. Thanks to the government contribution – seventeen percent on the first five grand! – these accounts will probably perform much better than equivalent term deposits over the same period. The trade-off is flexibility.
(If you are thinking about getting one of these accounts, get some qualified, independent financial advice. As Billy Connolly says in the ING ads, “It’s your money.”)
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