by Scott Pape - April 15th 2010
The Barefoot Investor investigates how the average first home buyer could get into their home 23 per cent quicker by using some unloved, unsexy, financial products…that work.
If you’re interesting in opening up a first home saver account, find out the best FHSA rates here.
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75 comments
As a first home buyer, or someone looking to be, is it better to buy a unit somewhere closer in the city, or go for say, a coastal town but then buy a house so that you have the land as well?
Caroline
Obviously it all depends on what is right for you. The question you are asking however, has to do with the cost of land and, proportionately what this adds to your purchase price (eg an inner city unit has a smaller component of land in the end selling price, but it's worth more than a home in the country). The correct answer is choosing the place that (a) you can afford, and (b) you want to live in.
This product sounds perfect! I wish I had known about it sooner. How strict is the 4 year time frame? My wife and I want to save at least 20% deposit (so not to pay mortgage insurance). we already live off her salary plus put aside for a car, plus almost 10% for savings. I am starting to work full time next year (gross 60+K) and we are thinking of putting my entire salary in a high interest account like raboplus (5.75% if you increase by $200+ per month). but we want to get a house in about 2yrs so we can have another child (currently 2 bedroom + renting)
Savings are in my name (me being a student + lower income worker for the first year or so), can we take advantage of this product?
Thanks
This product isn't for you – but the Ubank saver over he raboplus is
Thanks for the great explanation Scott. Sounds tempting! I'm a single 34yo gal and I've been saving for a deposit for about 6 years now (using an online saver). I've managed to get together 80k. Impressive for a part-time teacher! I wanted to buy a place but watched as house prices (fueled in part by the FHOG) climbed – here in Perth at least. I didn't impulse-buy and now have a decent deposit
I'm interested in the account you mention – sounds terrific – but am nervous about the 4 year rule: what if house prices suddenly dip in 2 years' time and I want to 'jump in'? That's what's holding me back…
Is this rational? Or is it best just to bite the bullet and put it into this account?
Cheers
Amanda
It all depends on when you're looking at buying. However, if you've saved that much of a deposit you're not exactly starting out. The FHSA is a great idea for someone with a longer time frame before they buy.
Just after some clarification with regards to the 'four financial years' period. Does that mean if I opened an account April 2010, I would be able to access the money four years from that date? Or, if I opened an account April 2010 and deposited money, that would be counted as the first financial year, any money deposited after 30 June 2010 would be counted as the second financial year, etc. And can I access the money in the fourth financial year, after I have deposited the minimum $1000, or do I need to wait until the end of that financial year? Thanks for your help!
The rules state that the FHSA must be open for a minimum of four years & deposits must be made in four separate financial years, but they do not need to be in a row eg a financial year is from July 1 to June 30.
hey scott, thanks for the vid. my partner and i have had ME FHSA accounts for 2 financial years now and they are working fine. one point i'd like to make is that there probably isn't any point contributing more than $5k in any financial year. The govt only co-conts to that point and i don't think locking up any more than you have to is a good idea.
also i'd like to point out that the FIDO website has has an FHSA calculator on it.
I agree with luc, plus it also needs to be pointed out that the 17% co-contribution only applies for the $5k deposit in the year it was made. So, effectively, you will be getting 23.25% interest (for ME) on each $5k each year, but what you already have there will be getting the 6.25% from ME (plus the 15% band for tax, which still works out better than any online saver account). So say you've had one of these accounts for 5-6 years and you have $30,000 and are going to make another $5k deposit that year, the effective interest rate would be ~8.7% – 15% tax (i.e. 35,000 at 6.25% plus 5,000 at 17%). So it is misleading to say that the account will be 23% each year when it gets smaller each year.
Having said that, obviously it is much better than an online saver account (if the conditions – e.g. 4yr period – is ok for you), and I admit I also have one of these accounts. But importantly, this account for me I consider to only be a adjunct to better saving plans, and I have a much larger share portfolio to build a sizeable home deposit.
The only other thing to say is that just like for the first home co-contribution from the Government when you buy your first home, the use of this account stipulates that you must live in that home for at least 6mo. So for those with plans of buying their first home as an investment property rather than to live initially, this needs to be taken into account.
Thanks Luc, all good points. Question: was it a positive experience? If you had your time over would you do it again?
Good points Ethan! I've never heard of anyone being investigated for the 6 month rule (and I know a lot of people have never lived in their properties) – has anyone else?
Yes! One of my friends is being audited for not living in his first home for the 6 months. After he had been living there for a month or so, he got seconded to an overseas office. Since moving back and being ‘found out’ he’s now having to pay back his grant!
My partner and I both have first home savers accounts. We opened them pretty much as soon as they were made available. We set the goal to save at least $5,000 each per financial year and so far have saved close to $20,000. At this stage we aim to keep them open for an extra year (5 years in total) and to have a deposit of at least 20%, ideally higher.
was it a positive experience?
i guess time will tell.
Wow, that's interesting. I just assumed there were measures in place to prevent first home buyers cashing in on Government hand-outs when using them for means of investment rather than the essentials of living (i.e. a roof over your head). I assumed this was time I was just going to have to serve!
I'm not sure if you wanted to devulge any more information, Scott, but do you know of or have heard of definite stories of first home buyers using their first property purchase for investment purposes rather than residence (if my memory serves me, it is a minimum of 6mo within the first 1yr)? Anyone else out there?
Here's some anecdotal information for you. I decided to write a column about young first home buyers. I spoke to about a dozen. From memory at least half were using the grant to fund an investment property – not a principle place of residence. Some were willing to live in the place for the first six months, others were subletting. My problem with this is that this isn't what the intended policy aim of the government – but then again – Government policy rarely works as it should.
Great! Do you have any other investments outside of the FHSA?
Yes, we have a few thousand in a share portfolio, some cash in a high interest account for emergencies (our “cash buffer”) and a wedding account that I put $300 per fortnight in to ensure we are able to pay off all suppliers before the big day (as per our budget). We've also put away enough for the honeymoon. Our only debts are HECS/HELP, we don't have credit cards.
Just in reply to your question for Luc, for what it's worth our only challenge with the FHSA has been keeping to our plan and not listening to others. We often have relatives/friends telling us that we'll miss opportunities or to get into the market now or we'll miss out totally. We also have friends showing off their new (and in some cases 2nd or 3rd) McMansions that they've borrowed 90-100% on. We're very determined to stick to our plan though…
I'm 23 and looking to start saving towards a deposit on a home. The term of the account doesn't phase me but I'm curious about Ethans statement about the effectiveness of depositing over $5k per annum. At the moment I can save around $840 per month which is around the $10000 per annum mark. Should I open a FHSA, throw $5k in there and put the other $5k into a term deposit? Right now I'm purely aiming for the biggest bang for my buck while I've got a few years to accrue some nice interest and wrap my head around the property market.
Cheers folks!
Putting any more into the FHSA than the contribution limit is wasted…although with the ME they're offering 6.25 per cent so it's still a good deal.
Well done Jess! I had a bloke on my show last week who wanted to spend $30k on a wedding and (from memory) he already had $40k in personal debts!
I really like to hear stories of people sticking to their guns.
Many people I have spoken to get 'savers remorse' and wish they could get at their money.
Thanks Scott! Always good to receive encouragement. I saw your show last week, weddings are so expensive, I saw a lot of my friends getting very stressed about how they were going to pay their weddings off so we have a very detailed budget and started saving straight away for ours. It's also been really handy to have the cash available as we've been able to negotiate discounts with some suppliers for paying the full amount upfront.
You left our c Scott, where you can get a job to pay for the mortgage. There is no point even looking at a cheap place in the country if its cheap because there is no work there, you will actually be far worse off than if you had bought that tiny unit in the city.
True, and again, the highlights the land value component of the property.
Jess how much did you end up spending?
I would wait to see what happens in a few weeks with the budget. There is talk of tax effective savings accounts. I will review then!
On the wedding? The initial budget was looking like $30k but now it's looking like a bit less than that. Both sets of parents are contributing and our share is a little over $10k, which worked out to be $300 a fortnight we needed to save from the time we got engaged. It's a lot to spend on one day but while all our other savings goals are being met we're reasonably comfortable with it, if at any point we have to sacrifice another goal or look at credit/loans we'd reconsider a few things.
Now I am the first to admit that, as a sad single, I have no idea about weddings – but $30k seems like a lot of dough. Am I being totally naive here?
I'm 24, and I opened a FHSA when I was 23 because it sounded great and I knew with my crummy wage I'd never be able to get into a house within 4 years. I've decided to chuck in $5000 per financial year to get the most out of the gov bonus, and I'm on track with that so far. When I was watching this and you said you'd done some research and found what you thought was the best account, I crossed my fingers cos I'd try to do the same, so when you announced it was ME I jumped up and did the wankiest dance ever XD I'm so glad no one was here to see it!
Anyway just wanted to say thanks.. It's been really encouraging to watch/read your stuff and know that you are being very genuine in your advice. It's refreshing. Keep it up!
Well done Annie, have you set a date that you'd like to be in your home?
Initially I wanted to be in a house by the time I was 30, but I've recently decided to move out with my boyfriend and go back to uni, so who knows how long it'll take now!
Don't try and pick where the market is going. Thats a fools game. Focus instead on what you can afford. If you can't afford it with a 20% deposit, don't buy it. And take money from the Government. Always.
weddings… I don't think you are being naive. I am sure there are ways to have a great fun, even classy wedding without breaking the bank! It seems people feel pressured to spend so much on having the wedding of the century, but forget it's a bit of a waste if they fail to invest properly in the marriage – divorce lawyers are expensive too!
One day, I hope I will be able to invest in a nice wedding (and not a divorce lawyer!)
I'm sure weddings can be done for cheaper, but you wouldn't believe what some wedding suppliers do to get hold of extra money (including charging a fee per head to cut the wedding cake, charging brides just to try on dresses, charging hundreds of dollars more for a wedding cake than they would for the same one if it was a christening cake, etc.) we haven't fallen for any of those traps, are using friends as suppliers where possible, hiring instead of buying where possible, have obtained some discounts and we're still paying a fair amount.
It's not really relevant to first home savers but it's an interesting topic.
Hi Scott, my dad bought me your book and i read it really only because it got given to me, however I unexpectedly absolutely loved it and now I'm looking at the property market for investment. I'm thinking of buying my first house, not to live it but solely for investment purposes. I'm 22 years old and have a decent salary and will have saved 25K by the end of the year. I was wondering if you had any tips for doing this? Also, it is possible to completely cover the mortgage repayments buy rent, or is that a pipe dream?
Cheers,
Anna
Weddings are crazy expensive. You just say “wedding” to a supplier and the cost is tripled! My husband and I just got married a month ago and the whole thing cost $10,000 which is considered inexpensive! I think there are lots of little hidden costs which you don't always know about til it is too late to change it. One of the bonuses was that we had a wishing well asked for monetary contribution instead of the usual gift registry of homewares. We split the money 50/50 and deposited into our FHSA's! We opened one each so we could essentially double our government contribution. Now our first home is just a little bit closer!
Great website about real estate development and finance. The real estate and hospitality industries are faced with a level of complexity never before seen.
The First Home Saver account could still be for you – the time period is 4 FINANCIAL years – and being near the end of this financial year, you can still satisfy that rule, but in actual time, it will be just over 2 years and you could buy and use your money.
Here's how:
1. before June 30 2010 this year open an account and deposit at least $1,000
2. Deposit by June 30, 2011
3. Deposit by June 30 2012
4. Deposit 1 July 2012
So anytime after 1 July 2012, you could buy and use it. The last govt contribution amount from the 1 July deposit wouldn't be paid until after you subimt your 2012/2013 tax return – but hey, if you can grab the othery money from the gov't, why not!! Also, you could open 2 accounts, 1 in your name, 1 in your wife's name to get double the benefits.
Also, the change announced in the budget now allows use of the funds to go towards your first home (mortgage) if you buy within the 4 Financial year period, instead of your money having to be transferred over to your super. You still have to serve the minimum 4 years though – but open it before June 30 – and it's onlyh 2 and a bit years away!!!
open an account
then it's only 2 actual years more, and then make the next contribution in July,
If you do as suggested and deposit your funds in June 2010, June 2011, June 2012 and July 2012, the return is over 20% after tax for that 2 years and 1 month. For someone on 30% tax rate, its close to 30% before tax for that time frame, risk free.
Another reason these accounts are so good is that the interest on your money is calculated daily and paid monthly, so your getting the benefit of compounding as well.
Yes it is. My husband and I got married 6 months ago. We were engaged for 10 months before the wedding and saved like mad to cover the cost. With smart ideas like ebay wedding dress made specifically for me and no photographer (our friends got amazing shots) and a wonderful mum and neighbour to make the cake we only spent about $10000 plus the $2500 for flights and accomodation for our honeymoon. The most expensive being the reception which was cheaper than most. Because we lived together we asked people to contribute to our honeymoon spending money and when we came home we didn't have any debt (or any savings).
I have no deposit and want to get a apartment, who would be best to approach (RAMS ??) before my rent hits over 1grand a month for a studio (an old one at that)
I think I will need about 480k and does the mortgage cover things like stamp duty ?
I’m 38 and a permanent resident
thanks to your website i have only recently become aware of the FHSAs. I wish i had known about them much sooner!!
I am currently in the process of paying down all my credit cards and then saving for a home deposit.
I am hoping to come into some inheritance from the sale of a property in the next 6 months. Given this, do you think it is best for me to open a FHSA or try and put my money somewhere with high interest – i am hoping that the inheritance money will be enough (and be avail in the not too distant future) so that i will have enough for a deposit in the next 12 months. any recommendations?
Wow, what a collection! Thanks for this. It was a joy reading through some of it and I might use it for further research.
Are you now able to use the money in your FHSA to go towards your mortgage if you buy a house before the 4 year period?
Monique
Monique, it is proposed that your FHSA funds can go toward your mortgage even if you buy a house before the four years are up. But you still have to leave the funds in the account for four years. That means you cannot use those funds as a deposit, but at least you are not forced to put your FHSA savings into your super. The legislation hasnt been passed yet, so until it is, nothing has changed.
just wondering are these accounts still in place. not that it matter for me as i am not a first home owner but haven’t heard much about them and some sites are still talking about them.
what an interesting read.
jess we did our wedding in 2008 for $10K. expensive bit for us was the photos. people who had been married before us gave us great hints for flowers, cake, dressmaker, photographer. honeymoon was in tassie in timeshare so only had fares/spending money. we got our dresses from a dress shop rather than a wedding dress shop and the flower girl dress from a wedding shop as dress shops didn’t do her size. page boy’s mother paid for his suit – mind you he didn’t go down the aisle – stage fright. parents also contributed money towards it which was nice of them and given we had been together for some time, we did the wishing well thing and still have the money in a term deposit that is earning compound interest.
I know I’m late to this conversation, (just like I’m late for most other things!) but I wanted to say that I got a first home savers account even though I’m not intending to buy a house in 4 years. My logic was that even if I’m only putting $25 per pay into this account, in 10 years or so when I’m ready to really start thinking about it I will already have a nest egg that I couldn’t break into. Good idea or not so good idea do you think? I ask because my nephew just turned 18 and I was thinking I would do the same for him and encourage him to just put in small amounts for the next decade or so till he starts thinking seriously.
Love your work,
R
Also late to the convo… Opened an account just before end of FY and put $50 in. That’s as far as it’s gotten. Now pregnant – YAH! and very concerned about how we are going to go with money on one wage. Will buying a home every be possible?! Scared about tying up money and not having access in an emergency. Thinking I could contribute the min $1000/year but that’s still a lot of money if we end up living week to week. I absolutely have being in debt! Pay CC every month and have a very small car loan which I hate, but wont be for long! What to do? What to do?… Lock the min amount up and gain the govt benefits or just use a high interest saver?
Helpful blog, bookmarked the website with hopes to read more!
hi scott. If I want to buy a house within four years can the money from an FHSA account then be used to pay off some of the morgage after the four year period is up? Or can you only use the money when you first buy a house?
My partner and I are looking in to getting one of these accounts and were wondering, if we both set up accounts to save towards our house, can we take out the money from both accounts when we eventually buy?
yes, I looked into the Ts&Cs and you can access the money the day after you make your 4th financial year contrib. which is what I’ll be doing next year, I opened in June 2009, deposited then, then in june 2010, then again in June 2011 then July 2011, and I’ll be good to go!
one point of note though scotty, and it’s to do with your precious compound interest!
that 17%, isn’t compounding, infact, it is only paid ONCE on the contributed amount. with normal interest, it is paid on the total contribution in your account EVERY YEAR, not only that, it is paid on previously earned interest as well! thus compounding interest! the lions share 17% is not.
as such, if the actual interest rate is noticeably lower than what you get in any normal online account (because there are less FHSA, and your money is locked in, you would expect less competition),
and you kept your account open for a long time, you could actually end up WORSE OFF than putting the money in a higher interest normal online savings account! not to mention all the conditions!
try it yourself, you can use a normal online savings calculator, just enter the rate that is the INTEREST rate on the FHSA, then add 17% to your ongoing contribution, you can’t just go onto the calculator and enter the interest rate as 23%!
need evidence that it isn’t as competitive? take the ME bank account that I switched to from CBA with the lure of 6.25%, they have now quietly switched it back down to 5.5%! no warning! no nothing! I hate those intro rate savings accounts, but at least they give you warning! the only thing to soften my disappointment is that 5.5% is still the highest on the market, and when you take into account the tax concession (when on a 30% income rate) it sill works out to be just a bit better interest than my ubank at 6.51%
also, consider that even after the 4 years is up, you still can only use the money to buy a house in Aus, consider the possibility that you might emigrate, because if you do, it will be as good as super.
overall though, its a good account. the gov just needs to make it so interest rates are as good as normal online savings accounts.
Hi Matt,
like you, I joined ME Bank. A little disappointing that they lowered the rate, but as you say it is still the best rate going. I rang them and asked why they lowered, but they didnt offer a good reason. I also asked about interest calculation and worked my own account transactions to confirm the info given which is correct. You are paid interest on every dollar in your account, which is calculated daily and paid monthly.
The Govt contribution is paid once, but that has nothing to do with compounding interest.
The Govt Contribution earns interest just like the rest of your money in the account. The total amount in your account earns compounding interest. That just means that the interest is added to your balance and that new total earns interest, or as Benjamin Franklin said “money makes money, and the money that money makes, makes money”.
If the Govt were to put in 17% each year on your total balance, Australia would be broke in no time.
Even if you keep your account open for 10 years or more, it would end up a better return because of the tax break. If you had $100,000 in a savings account eraning 6.5% paying 30% tax you end up with $4550 after tax. In the FHSA $100,000 at 5.5% taxed at 15% gives you $4675, and thats without the Govt contribution.
I havent come across a better return, govt guaranteed, anywhere yet.
So I’ve opened a FHSA account with ANZ, on the 28th of June this year I deposited $1000, so managed to reduce the “4″ year term to a theoretic 2 year 5 day term.
Problem is, I’ve been waiting for 6 months for my 17% co-contribution! I did my tax return on July the 5th, where is my money? When does the government pay it? I’m missing out on my interest from my co-contribution!
Can I invoice the government for this missed revenue?
Hi Rhett
give ANZ a call. Given that these accounts typically calculate interest daily and pay it monthly, I would have been on to your bank on August 1st, asking where the money was. If no joy with your bank, ring the ATO.
Can you clarify the taxing of the FHSA for me please? Is it only the interest paid by the financial institution that is eventually taxed – at the rate of 15% and not the 17% contribution paid by the government?
Also when does taxing of the account occur?
I have found the PDS very difficult to understand!
A few quick questions. Being in a defacto relationship can my partner and I both open our own FHSA’s even if we get engaged and married within the 4 year period? (Can we still hold onto our own separate accounts when we are married?) If we save independently to our FHSA’s as well, can we by a block of land for example and then use our FHSA’s to build a new house etc or are we not allowed to buy anything before we finish saving in that 4 year period?
I’m 30 years old and have just paid my final payment on my home loan on the 31/12/2010. Yay to being debt free and starting the New Year on a high!! My question is….now what?? I see that you mention managed funds, etc but what are your thoughts on investment properties? I have a small amount invested in a managed fund over the past 5 years and the returns haven’t been great (worse time for it, I must admit). I thought property might be a more familiar way to go. Do you have any suggestions on where to get some easy-to-understand information on this? Where do I start?
So, can you keep this account going for longer than 4 years? say in 4 years your not quite ready and want to keep saving to 5 or 6 years, can you do that, or do you lose it into your super?
thats the only thing that concerns me.
Are the FHSA accounts only available for first home buyers?
@ trish
… really FHSA <— FIRST HOME save account. I think that says it all.
Hi Scott,
Just wondering if you know any further details about the changes to FHSA that have been released?
I am interested in whether the FHSA money that can be paid into your mortgage, can actually be paid into an offset account attached to your home loan.
Thank you Scott.
]
A few months ago, ANZ Business Banking “divorced” us and called in all our loans and we nearly went under.
You recommended that we try Suncorp, who we did not know much about, being Melbourne based, but thank goodness we did!
We were refinanced and now are secure financially, with excellent service [although a few more local branches would be handy
Basically, you helped save us from financial ruin and with about 75% of assets retained.
25% went in ANZ “fire sale” in which we lost heaps of $.
THANK YOU SCOTT!!!
Hey everyone. I have one quick question about FHSA’s. Can my partner and I open two seperate accounts and then put these towards the purchase of the same house?
I was thinking the same thing!
Hi Scott,
Im beginning to save up for my first property which will be an investment property. However Im not sure which account to put my money in. I have saved about $3000 so far. Im not sure whether i can put it into a FHSA or just a high interest savings account? If you have time to respond I’d greatly appreciate it.
Regards Nikolas
wow, wish we found this earlier!
I’ve been looking at some of the providers online, looks like some of the rates have changed since your entry was posted in April 2010. Any reccomendations on current rate comparisons? much thanks
But is it really over 4 years or could it be 2 years and 2 days (a day either side of the start and end of the 1st and 4th financial year)!!
Hi Scott, my partner is a first home buyer with a first home saver account. I already own property. If we purchase a property together, will my partner be able to access the monies in the first home saver account? Or will the fact that i have previously owned property make my partners’ account ineligible?
Thanks
Hi Scott,
I cam across this product through my personal finance subject at uni and I am now really tempted.
I’m finishing my commerce degree at the end of this year and am beginning full time work ($50K) next year (2013). I’m currently saving $200/month and also have $5,000 in a heritage term deposit. The one thing I am concerned about is I’ve heard that you have to at least make a $1,000 contribution/year. Can you confirm this as well as maybe explain the new changes to accessing your money before the 4 year period?
Many thanks