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The pricey housing market is locking many Gen Yers (and Gen Xers!) out of buying their first home. According to official property figures from HIA, the average home loan rose from by $100,000 to the current $425,000 in the last three years. If you needed a total income of $72,000 back in 2005, you now need to be earning at least $112,000 to afford a decent place.
No wonder more and more young Australians are living at home. HIA found that there are more 25 – 29 year olds living at home today than back in the 80s. Looks like the Destiny’s Child song ‘Independent Woman’ is more a hit record than a reality for many.
Luckily the Australian government is taking some steps towards making property more affordable through a new scheme introduced this year: the First Home Saving Account (FHSA).
The account works just like a bank account except you set it up specifically to save money for your first home. As an incentive, the government will match your savings by giving you some special tax breaks and extra money on top – shaving several years off the time it would normally take you to stump up a deposit.
There is a catch. There are strict ground rules you have to follow like setting aside a certain amount for the first few years. Also, you can’t take the money out other than for buying a property. For example, if you change your mind, all your savings go straight to your super fund, which is money you can only cash out when you retire.
For a taster of how you can use the homesaver account to get started, here are some basic facts:
Who is eligible?
Anyone between 18 years old and under 65 is a first time home buyer.
What will the government do?
It will give you the equivalent of 17 per cent on the first $5,000 you make each year. For example, if you ‘deposit’ $5,000 onto an FHSA, the government will also ‘deposit’ $850.
All your deposits are tax-free and the interest on your deposits (called ‘investment earnings’) is only charged 15 per cent tax. This is a lower tax rate when compared to just putting the money in an ordinary savings account where it could attract a tax rate equivalent to your personal one (up to 46.5 per cent tax for some people). The account can remain open for as long as you need without fees or penalties (except if you breach certain government conditions).
What’s the catch?
All the benefits mentioned above only apply up to a maximum savings of $75,000. That is, you can’t contribute any more money and the government won’t give you additional money or additional tax breaks after you save $75,000.
Once you’ve bought a house, you still need to live there for at least six months.
If you change your mind, the money goes straight into your super fund, except in special circumstances (e.g. terminal illness).
You have to deposit at least $1,000 over the course of at least four separate financial years. If you’re saving up with someone else, only one person needs to meet this criteria to remain eligible.
Is the homesaver account worth it given the restrictions? According to investment experts, a couple can theoretically save as much as $88,000 in the first five years through a combination of the government “bonus” and the low tax rate on their money’s interest.
The best thing about it is that it is ‘enforced saving’ as the government gives you a target sum to reach before they dosh out your bonus. You can’t take the money out other than for buying a house so you can’t just withdraw money when you’re suddenly in the mood for a car upgrade or for a European holiday.
For more information, check out www.homesaver.treasury.gov.au.
Disclaimer: The writer of this article is not a financial planner and is not licensed to give advice. All the information contained here are for educational purposes only.