Low Tax First Home Saver Accounts

This article is taken from the Official Website of the Australia Labor Party, dated February 05, 2008. Labor Government will help the first home buyers to achieve their dreams by establishing a new, law tax, First Home Saver Accounts. A couple with an average wage and saving 10% of their income are able to save a deposit of $64,000 over five years. This deposit is 30% more then the ordinary saving account. The fund in the account can only be accessed to purchase a home four years after the establishment of an account. Total contribution in each year is cap at $10,000. $5,000 will be apply to contributions made from pre-tax income each year and the remainder may only be after-tax contributions. This saving account works pretty much like a superannuation.

Case Study

Tax Rate

A$30,001 – A$75,000

$3,600 plus 30c for each $1 over $30,000

12% – 22.8

If you are earning $45,000 a year, your after tax income will be $36,900. If you are putting the maximum allow to the First Home Saver Accounts which is $5,000,  your after tax income will be $33,400. $5,000 is tax at the rate of 15%. This means that you are saving ($33,400+$4250) = $37,650 / year which is $750 more.

Winson’s Thought:

Although this may sounds like a good deal as you will be getting 30% more then the ordinary deposit account but four years is not a time frame that I am willing to commit. 30% extra is within 5 years period. That means a year is only 6% more.  The 30% extra is calculated base on average interest rate of 6%/annum. If any point of time you are getting 12% perannum, it will be better off not to put your cash in the FHSA.

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A Rudd Labor Government will help aspiring first home buyers save a larger deposit by establishing new, low tax, First Home Saver Accounts.
Over the first three years Federal Labor’s First Home Saver Accounts will help around half a million first home buyers save a bigger deposit by establishing superannuation-style low tax savings accounts.Federal Labor’s First Home Saver Accounts will help boost national savings, with the accounts anticipated to hold around $3.5 billion in savings after three years.

Federal Labor’s First Home Saver Accounts will allow a couple – each on an average wage and saving 10 per cent of their income – to save a deposit of around $64,000 over five years.

This $64,000 deposit is around $14,500 – or 30 percent – more than could be achieved by saving through an ordinary deposit account.

This benefit amounts to $2,900 extra a year in savings towards a home deposit.

One of the greatest obstacles to buying a first home is saving a deposit.

A larger deposit will also reduce the debt burden for young homebuyers and can help them avoid incurring costly mortgage insurance.

The new First Home Saver Accounts will build on the arrangements for superannuation – allowing potential first home buyers to access similar tax breaks on their first home savings and unlock higher returns.

Savings with Labor’s First Home Saver Account will receive preferential tax treatment in two key ways compared to ordinary savings accounts:

• Savers will be eligible for a low tax rate of 15 per cent on the first $5000 of income they deposit in their account each year – rather than the ordinary tax rate they would pay.
• Interest earned will be taxed at 15 per cent or less.

Under an ordinary savings account both contributions and interest earned on savings are taxed at the individual’s relevant income tax rate.

As a result, the tax benefit provided by the First Home Saver Account will enable most first home buyers to save substantially more than they otherwise would.

In addition to the first $5,000 in tax-preferred contributions an additional $5,000 a year may be contributed towards a First Home Saver Account from after tax income without paying any further tax on that contribution.

This will allow parents to help their children to save their deposit.

Even though it typically takes first homebuyers an average of five years to save an adequate home deposit, Labor’s plan will allow savings to be withdrawn after four years to provide a reasonable degree of flexibility in an ever changing property market.

The minimum savings period of four years will also enable superannuation funds to achieve higher rates of return on First Home Saver Account deposits.

Withdrawals from the accounts will only be permitted for the purchase of an eligible first home and will be tax-free.

The newly-created accounts will be separate to individuals existing superannuation and individuals will not be able to access their existing retirement savings.

A Rudd Labor Government will forgo $600 million in tax revenue – in the first three years – to give first home buyers access to the newly-created accounts.

FHSA Fact Sheet

Source : http://www.alp.org.au/media/1107/mshou040.php

High demand suburbs

	Top 20 Growth Suburbs (Annual)
			Dec 07 median	Dec 06 median	Annual Change
	1	Blackburn	$745,000	$455,000	63.7%
	2	Flemington	$597,500	$377,250	58.4%
	3	Braybrook	$355,000	$225,500	57.4%
	4	Burwood	$710,000	$457,500	55.2%
	5	Essendon	$865,500	$563,000	53.7%
	6	Carnegie	$851,000	$556,250	53.0%
	7	Brunswick West	$680,000	$445,000	52.8%
	8	St Kilda East	$860,000	$578,000	48.8%
	9	Ringwood East	$462,500	$313,500	47.5%
	10	Mount Waverley	$707,500	$480,000	47.4%
	11	Coburg	$540,000	$367,500	46.9%
	12	Seddon	$595,000	$405,000	46.9%
	13	Caulfield North	$1,330,000	$905,500	46.9%
	14	Glen Waverley	$687,000	$470,000	46.2%
	15	Kew	$1,307,500	$898,750	45.5%
	16	Woodend	$432,000	$300,000	44.0%
	17	Altona North	$425,500	$296,000	43.8%
	18	Gisborne	$387,000	$270,000	43.3%
	19	Richmond	$789,000	$551,000	43.2%
	20	Rosanna	$600,000	$421,500	42.3%
	Note: Only suburbs where a minimum of 30 sales recorded in each quarter are included.

source : http://www.melbourneleader.com.au/article/2008/01/26/28369_mev_news.html

During my previous post I wrote about the median growth rate at major city like Melbourne, Perth, Sydney and Perth. Today I was looking at HeraldSun and they wrote about the median growth rate for individual suburb. I was suprise to see that there are 7 suburbs that growth rate is more then 50%. Blackburn achieve growth rate of 63.7% for the year of 2007.

What will the property trend be like in 2008 ?

Property price in melbourne had went up 25.2%  in 2007. For those who need a place to live, fair enough that they decide to purchase one now. For those who wouldn’t mind renting, there is no harm waiting for another year to see which direction melbourne property heading to. With the likelihood that interest rates will rise again, it is expected that the growth of the property in melbourne will slow down. If you do take note of the news, you would have heard how well perth property did last year. The significant growth is mainly due to the resource boom during then. This year Perth property growth is only 1.7%. Why in a hurry to get one at this point of time where the price for melbourne property is at the peak ? Of course there will always be a what if question. What if the price keeps on going up ? The only what if question I have in my mind would be .. What if the growth rate in Melbourne for this year is less then 2% ? Since putting money in saving account gives you higher return then that, 2% growth is negligible. I am not saying that putting money in saving account is a long term solution. What I am trying to say is now you would have more time to consider on how to go about getting one rather then making the decision to get one now. To commit your self in a property now, the biggest what if will be the interest rate. If property price is stagnant and the interest rate is going up, wouldn’t it be wise to see how is things like in half a year time or probably in a year time ? At least during then you would have more savings and your earning capability will be higher as well.

How to reduce your loan repayment period using an Offset Account?

An offset account is a saving account linked to a mortgage account so that the interest earned is applied to reduce the interest on the mortgage.

The biggest advantage of an offset account is that it enables you to radically reduce how much you owe by cutting the time it takes to pay off a home loan. By utilizing interest accrued to reduce the size of principle, the user of an offset account is able to avoid paying any tax on the interest earned on savings.

For example, say if you have $10,000 in your saving account and earning interest of 7.55% , the interest would normally be paid into your saving account there for you would have to pay tax on it. With an offset account, interest accumulated will be credited to your morgage account. This will create a saving which works to reduce the length of your loan.

Scenario A

Putting $100 / month a side in a high interest saving account for 20 years and 3 months will earn you $25,239.09 with annual 6.4% interest.

Scenario B

In scenario B, user puts the $100 every month in the offset account instead of the high interest saving account for 20 years and 3 months. The total repayment of $197,554.48 is needed to pay off the mortgage.

Analysis :

In scenario B, the user puts $100 / month in his offset account and he pay off his mortgage in 20 years and 3 months time.In total he would have paid extra $24,300. Total payment made by the end of the mortgage is $197,554.48.

In scenario A, he put $100 / month in his saving account with interest of 6.4%. After 20 years and 3 months, he would have gotten $25,239.09 in interest. After 30% tax, he would only have $17,667,36. By then only he decides to put all his money he accumulated in his saving account into his offset account. Total payment made by the end of the mortgage would be $232,915.76.

Conclusion :

For just putting $100 every month in your offset account instead of your high interest saving account, it actually saves you a whoop amount of $35,361.28 by the time you finish repaying your mortgage. Effectively with your mortgage account, you will only need a offset account that works similarly like your daily saving account.  If your salary is $2,500 and is credited to the offset account,  the daily interest calculated on the principle of your mortgage will be $2,500 lesser.

Patterson Lakes

Went to Patterson Lakes for lunch this evening. What makes the area interesting is the houses and apartment around the Patterson Lakes. Patterson Lakes is located 37km from the city. It takes probably an hour to reach Flinder Street. At the lake, there are bays for the boat to park on. As stated on “Property Investor”, the mediam price for patterson lake is around $360,000 for a house and $330,000 for a unit.  But of course property that has lake view or river view will be slightly more expensive. River front land with 141 square metres was selling for $370,000. ( $2624 / sqm ).   The rest of the land range from $520/sqm to $790/sqm.

Median Property Trends for Houses and Units in Patterson Lakes

Notice: To the extent that this report has been developed using information owned by the State of Victoria, the State of Victoria owns the copyright in the Property Sales Data which constitutes the basis of this report and reproduction of that data in any way without the consent of the State of Victoria will constitute a breach of the Copyright Act 1968 (Cth). The State of Victoria does not warrant the accuracy or completeness of the information contained in this report and any person using or relying upon such information does so on the basis that the State of Victoria accepts no responsibility or liability whatsoever for any errors, faults, defects or omissions in the information supplied.