FHSA building wealth
THE much publicised First Home Saver Account Scheme opened for deposit taking on 1 October 2008, but its reception by the public was lukewarm.
However, these accounts can be a useful wealth building tool in some circumstances, even though there is an apparent four year lack of access period. The regulations merely require that a saver deposit at least $1,000 in their First Home Saver Account (FHSA) in each of four financial years.
If an account holder is purchasing a property jointly with another account holder, only one person needs to meet the four year requirement. The other party can withdraw their funds irrespective of their saving period.
These accounts certainly enable young people to boost their house deposit because the government is contributing 17 per cent on the first $5,000 of funds deposited each year until the balance reaches $75,000, at which point no further contributions can be made. This is equivalent to a capital guaranteed tax free return of 17 per cent per annum on top of the interest that will be paid by the bank.
A further benefit is that interest on these accounts will be taxed at just 15 per cent, the same as superannuation. If a first home saver in the 30 per cent tax bracket deposited $5,000, and received $250 interest for the financial year, tax would take just $37.50, leaving them with $212.50 in addition to their $850 from the government. This is a total after tax return of 21.25 per cent.
The May Federal Budget acknowledged the possibility that a first home buyer may buy a home using a mortgage before they access the money in their FHSA. Accordingly the scheme was changed to enable them to roll the balance of the account into their mortgage once they have satisfied the access condition.
Used properly, the FHSA scheme can be a useful tool to help young people achieve the goal of buying their first home. However, it is also vital they understand that the secret of making money in real estate is to buy a well located property at a bargain price and then focus all their energies into getting that initial big mortgage down to a manageable size. If they do that they are well on the road to financial success.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.