A first home saver account (FHSA) offers first time buyers government contributions towards their deposit as well as tax advantages. But what exactly do these accounts entail and are the rewards worth it?

A first home saver account is a resource available to would-be home buyers and is offered by many banks, credit unions and non-bank lenders.

While there are many contributions and low tax features associated with the account that will appeal to potential first home buyers, it’s important to look beneath the surface and read the fine print before you fully commit.

What you need to know

To be eligible to apply for a FHSA, you must:

• Be aged between 18 and 65
• Have a tax file number to present to the provider
• Not have previously purchased or built a first home in which to live in
• Not have or previously had a FHSA
• Understand that penalties apply if you open an account when you do not meet the eligibility criteria.

The features of a FHS

•  A government contribution of 17 per cent on the first $5,500 you contribute to the account each year
•  Additional government contributions to be deposited into your account after you have placed your tax return
•  The ability for both the account holder and another party, such as an employer, to make contributions into the account
•  No minimum annual deposit to keep the account active
•  Contributions not taxed when deposited into the account
•  Interest or earnings being taxed at 15 per cent as opposed to your marginal tax rate

While you – or your children, if they’re looking to buy their first home – can benefit significantly from opening a FHSA, be aware that, benefits aside, there are also numerous guidelines that come attached.

One of these to keep in mind is that no further savings will be contributed once the account balance reaches $80,000. Another to consider is that government contributions will not be made if you decide to move overseas, even if you are still making your own contributions to the account.

Withdrawing from a FHSA also comes with its own set of stipulations. When opening an account you must be mindful that a minimum contribution of $1,000 over at least four separate financial years is required before you can withdraw funds, for example.

Also be aware that there are conditions attached that limit how you can use these funds when it comes to withdrawing them. If you decide that you are no longer interested in purchasing a property you will find that you are not entitled to regain account contributions. Penalties can apply if you withdraw these funds and do not use them to purchase a property.

Lastly, remember that the property you are withdrawing the funds for must be lived in for at least six months within the first 12 months of buying.

Saving your cash is a smart start to your wealth building strategy

There’s no doubt that leveraging with ‘good’ debt offers a fantastic way to build your personal wealth, but learning to stash your cash is equally important in building financial security and stability.

While Australians aren’t exactly known as a nation of savers, with household savings levels plummeting since the 1970s, the recent financial crisis has served as a healthy reminder that it pays to have money saved ‘for a rainy day’.

But what is the most effective strategy for managing your savings and what options are out there?

Regular savings schemes

This is an ideal strategy to build some sort of nest egg, perhaps towards a future goal, but also to keep aside in the case of unemployment or an unexpected health issue.

The best way to save regularly is to organise a direct deposit scheme that channels a set amount of cash into a savings account every month. This ensures you keep your savings on track and will also see you save without even realising it.

While the low Reserve Bank of Australia cash rate means cash returns have fallen in recent months many banks are still offering some pretty compelling deals. Shop around, particularly online, to find the best offers and remember that different banks’ rates do vary significantly – so don’t sign up to the first deal you find.

Term deposits

When it comes to capitalising on cash, a term deposit can offer excellent returns. Your money is locked in the bank for a set period and in return the bank will reward you with some of the highest available interest rates.

Your options range anywhere from 30, 60 or 90 days to as long as several years; the larger the deposit and the longer the term, the higher the return will generally be.

The downside is you’ll be charged a fee if you break the agreed term which may cancel out any interest that’s been earned.

Mortgage offset account

Extra savings can be used to offset the amount owed on your mortgage. While this approach doesn’t earn you interest on your savings it reduces the interest you pay on your home loan. Your daily cash deposit amount is effectively deducted from the overall sum owing on your mortgage, reducing the interest repayment. At today’s rates that can be equivalent to a saving of 5 per cent or more, and because you are saving rather than earning interest, it is non-taxable!

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