Home Loans News: 08 Mar 2010
Special-purpose savings accounts can earn up to 34 per cent thanks to government incentives.Surprisingly few people have taken advantage of the new First Home Saver Accounts (FHSAs) despite the lure of a federal governmentco-contribution and a tax break on interest earnings...
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According to figures from the Australian Prudential Regulation Authority, just 15,300 FHSAs had been opened as of September 30.
They held a total of $49.3 million, or an average of $3222.
The authority's data shows a notable slowing of deposits since FHSAs were introduced in October 2008. While the amount of money in the accounts almost tripled between December 2008 and March 2009, and more than doubled between March and June last year, there was a mere 20 per cent increase in the next three months.
"First Home Saver Accounts haven't been a very popular type of account despite the fact that they can provide an excellent effective return on savings," says the chief executive of financial product comparison service InfoChoice, Shaun Cornelius.
According to InfoChoice's calculator (infochoice.com.au/calculators/first-home-saver-calculator), someone who opens an FHSA with a $2000 deposit then contributes $1000 a year, earning 4.5 per cent interest, could achieve an effective return of 29 per cent once the co-contribution is taken into account.
They'd have contributed $6000 but earned $731 in interest and received $1020 from the government.
The top rate on offer for an FHSA is 6.25 per cent, from ME Bank (see table). At that rate, using the same example, the effective return would be 34 per cent. APRA lists 19 financial institutions that provide an FHSA (though not all are covered by InfoChoice). They are mostly credit unions but also include Commonwealth Bank of Australia, Australia and New Zealand Banking Group, AMP Bank and ME Bank.
Under the program introduced by the Rudd government, Australians aged 18 and over can open an FHSA to save for their first home.
The government makes a contribution of 17 cents for every dollar of the first $5000 saved each year. That's potentially $850 a year.
In addition, any interest that's earned on the account is taxed at just 15 per cent, rather than the individual's personal tax rate, which could be as high as 46.5 per cent.
Also, the money in an FHSA doesn't count for the Centrelink assets and income tests.
However, there's a cap of $75,000 on account balances. On the basis of a 20 per cent deposit, that's only enough to get you into a $375,000 home.
If your lender is happy with a 10 per cent deposit, that's a perhaps more realistic $750,000 for a Sydney or Melbourne home.
Also, the money can't be taken out unless a minimum contribution of $1000 has been made in at least four financial years (though not necessarily consecutive years).
And while withdrawals are tax-free if the money is used to buy or build a first home to live in, the money must be transferred into superannuation if the account holder decides in the end that home ownership isn't for them.
"The mechanics of the account are quite complex and not easy to understand - particularly for the target market of first-time home buyers, who are typically less financially sophisticated," Cornelius says.
The timing of the introduction of these accounts wasn't good either, he says. Home loan interest rates were at record lows and people also wanted to get on and buy a property now - not wait four years - because of the federal government's short-term boost to the first-home buyer's grant.
Credit unions see the four-year "lock up" timeframe as a big impediment.
"[There has been] good interest in FHSAs but some credit union and building society members eventually choose not to take up the product because of some design flaws in the program," says Mark Degotardi, the head of public affairs for credit union and building society umbrella group Abacus - Australian Mutuals.
"Abacus has written to government suggesting that the four-year lock-up timeframe be removed. This is clearly the biggest disincentive for savers that our members are seeing.
"In our view, if someone is able to purchase a house within the four-year period, then they should be permitted to do so under the program.
"If the lock-up period is removed, then clearly the co-contribution makes this an attractive option for would-be home purchasers but if it's not removed then this disincentive will mean that many savers will choose more flexible but less attractive savings options."
key points
First-home saver accounts can provide an effective return of about 30 per cent.
The government makes a 17 per cent co-contribution to your savings.
Interest earnings are taxed at just 15 per cent.
However, money in these accounts is locked up for at least four years.
If the savings aren't used for a home, they must go into super.
SOURCE: Lesley Parker - Sydney Morning Herald
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