The old adage that ‘slow and steady wins the race’ has never been more fitting than when used to describe first homebuyers. After all, unless you’re lucky enough to be gifted a hefty deposit, it’s slow going trying to save enough cash to invest into your very first home.
Enter the first home Saver Account (FHSA), a program designed by the federal government to provide Australians with a simple, tax-effective way of saving for their first home, through a combination of co-contributions and low taxes.
When the FHSA program was launched the in 2008, the announcement was almost immediately overshadowed by the doubling of the First Home Owners grant.
Suddenly, there was no need to cobble together a deposit in small increments over several years, as state and federal governments were handing out combined grants and packages worth tens of thousands of dollars to encourage homebuyers to act right away.
But now that the FHOG is back to $7,000 and the economy has regained some stability, it might be worthwhile revisiting the FHSA to see if it can help you take one step closer to your home ownership dream.
How it works
The program encourages you to save money by matching your own contributions with a 17% government co-contribution.
Essentially, the more money you save, the more the government will contribute, up to a certain limit each year. The maximum annual government contribution is currently $850 – equal to 17% of $5,000 – although this amount is increasing to $935 (17% of $5,500) for 2010-11.
You’re not liable to pay any tax on your account earnings, and you can set up an FHSA with any participating bank, credit union or building society. Also, you can still apply for a First Home Owners Grant if you have a first home saver account.
To be eligibly to open an account, you must:
- be aged 18-65
- have a tax file number
- not have previously owned a home in Australia that has been your main residence, and
- not have previously had a first home saver account
- make contributions from your after-tax income – you can’t salary sacrifice into a FHSA
The FHSA offers a great opportunity to save towards your first home, but there are some potential negatives to be aware of.
The account works under a system known as the ‘four-year rule’. This means that you have to contribute at least $1,000 per year into your account in at least four financial years (not necessarily consecutive years) before you can withdraw the money to buy a home.
Therefore, you have to keep the account open for at least four financial years before you can access the money, the only exception being if you are aged 60 or older, in which case you can withdraw money at any time.
Also, if you change your mind and don't want your account anymore, you can’t simply close the account and withdraw your cash: your only option is to transfer the entire account balance to your superannuation fund.
If you plan on buying your first home within the next few years or you need more flexible access to your cash, then the FHSA may not be right for you. For more information and further details about eligibility and frequently asked questions, click here.