The first step towards your first home: What you need to know

Finding somewhere to live can become a dilemma for many people, with rent rocketing out of reach and the huge effort to save a deposit for a home loan both conspiring to keep young people in their parent’s home longer (leading to the “KIPPERS” phenomenon – Kids In Parents’ Pockets Eroding Retirement Savings).

The tighter credit market of recent years has made borrowing the full purchase amount of a house (that is, no deposit) a far more perilous option. And if there was a glimmer of something good coming out of the recent global financial crisis, it was the prospect of residential property being pushed down in price to levels that first home buyers could imagine possible (although the jury’s still out on housing affordability).

In October 2008, the government launched the first home saver account scheme, which offers incentives for first home buyers by way of government contributions and lower taxes on these accounts.

With the first home saver accounts, a government contribution adds to your savings, and the earnings (interest) on your deposits are tax-free to you (the interest is taxed at the low rate of 15% but it’s paid by the financial institution that provides the account).

You are required to have not owned a home before (that you’ve lived in, but investment properties are acceptable), and be older than 18 but younger than 65. First home saver accounts are offered by banks, credit unions and building societies as well as life insurance companies, public offer super funds and friendly societies.

A first home saver account operates more like a term deposit, as you have to keep your savings in it for a minimum time (which in this case is four years, although these four years do not have to be consecutive), and after you’ve got enough to build or buy your first home you have to withdraw the lot and close the account.

But the more you can put in, the more the government will also contribute – up to a point. It has promised to top up first home saver accounts by 17% of an account holder’s contributions on the first $6,000 you deposit each year. This means that if you deposit $6,000 in one financial year, you will receive $1,020 from the government.

Anyone can chip in for you (if say mum and dad are keen to get you on your way), but if you strike a deal with your employer to contribute on your behalf, funds going into your account need to be from after-tax income.

You can put in as little or as much as you like every year (up to a maximum, which is $90,000 for 2012-13, and which the government says will be indexed based on average weekly earnings for coming years, but only pushed up in $5,000 lots). But when you’re ready to buy or build, to be eligible to withdraw you need to be able to show that you made personal contributions of at least $1,000 for each of four financial years (they do not have to be consecutive years).

You’ve got six months after withdrawal to use the money for getting into your first home, either by way of making a deposit on a house or land, paying to get the building of a new house on the way, or meeting the costs involved, such as legal expenses or council fees. You also need to make the home your main residence for at least six months once it’s built or bought.

If buying or building a house doesn’t go ahead for any reason, the funds have to be re-contributed within six months into a new first home saver account to maintain concessional treatment (but you can only have one account at a time).

Under the current rules, if an account holder buys a house before the minimum four years, the balance must be transferred to their superannuation fund so that it remains in a low-taxed environment. This is also the case if for some reason you decide not to go ahead. But under an amendment put forward in the 2010-11 federal budget and now passed into legislation, account holders will be allowed to transfer the balance into an approved mortgage.

The “first home owners grant” may still available to you if you qualify (but check first). You can in fact get the grant and have a first home saver account. The balance of your first home saver account doesn’t count towards any income or assets tests.

The government website MoneySmart has a first home saver account calculator to help work out how much you can save over a certain period of time. Click here to access its calculator.

Consult this office on how to get a first home saver account and if it is the right option for you.