Are you 18 or older and thinking about buying a property?

First Home Saver Account

What is it? A First Home Saver Account is a bank account where the government pays 17% contribution on money you put in PLUS bank interest.

But Are you thinking about buying a house in less than 4 years? – You might decide the account is not for you.  But you might want to read on just in case.

The Catch: You can’t transfer the money against your (new) home mortgage until you have met all conditions below.

Main Conditions:

To open the account

1. Only for your first home
2. Aged 18 or above

To use the funds for your first home

1. Hold the account for at least 4 years
2. Need to have 4 years where yearly contribution is  $1,000 or more.

To summarise: If you start a first home saver and buy a house after four years but haven’t put $1,000 in a year for at least 4 years – the money is kept in the account until you have.

What you get on the money you put in

1. 17% government contribution which comes after you lodge your tax return each year (nothing required to be put in the return the ATO/government works it out)
2. 2.       Regular Bank Interest – say 4%+

Other stats:

1. Maximum contribution amount per year you get 17% on = $5,000 (so max you could get each year is $5,000 x 17% = $850)
2. Maximum Length you can hold the account – no set date (if it takes you 15 years to save for a home – so be it!)
3. Maximum amount in account before 17% contributions stop = $75,000 (although can still earn bank interest after this)
4. Minimum age – 18

This was one of my top 5 tips for Generation Y when nomoney featured on A Current Affair in January 2010. Has anybody started a first home saver account? If so – please send me an email nomoneyau@gmail.com

First Home Saver Tips and Comments

Nomoney Comments on the first Home Saver

Are you saving for a home?  – If Yes then you probably want to buy it in under 4 years.

If you are not saving for a house – then you probably wouldn’t plan 4 or 5 years ahead and wouldn’t dream of setting up a First Home Saver Account. But maybe you should… If you are 18 or over and plan to buy a home – this is a pretty good deal.

At least the money isn’t going to super! –(like the original plans)

Questions you might have:

What If I want to buy a house in 3 -4 years but it might take me 4 – should I risk it?

Maybe…Talk with your lender/mortgage broker – maybe your lender might take the money into account (but you might have to shop around for a lender to do this and it might cost you extra interest or bank fees).

What If I want to buy a house in 1-2 years– should I open an account?

If you put $1,000 a year into the account you would get $170 (plus bank interest which you would get anyway). $170 Contribution x 4 = $680.

You might get $680 extra cash (for $4,000 investment) but might not be worth it for the hassle involved (setting up the account, making sure transfers are made, getting the money out).

Although it Is better than nothing.

Open a First Home Saver account asap.

Save, beg or  borrow $1,000 each year into the bank account until:

1. You are ABSOLUTELY 100% sure you won’t be getting a house within 4 years
2. The 4 years are over

After you are sure you will meet the conditions above then

Transfer up to  $5,000* a year  until:

1. You buy your first home
2. You reach the $75,000 cap (although I don’t think there are any penalties in going over this – but you might wish to not keep all your eggs in one basket.

*As the 17% on contributions is only paid $5,000 – you may choose to put the excess over $5,000 into another account with higher interest and then transfer the next year.

The above is based on my understanding of the information provided by the government  and the ASIC calculator. You should do your own research and seek professional advice.

These are general comments – which may not work in your financial situation – see our disclaimer page. 

For example: If you bought shares for $1,000 and sold them for $2,000 then you would have a capital gain of $1,000.

Also, if you bought shares for $1,000 and sold them for $500 then you would have a capital loss of $500.

Capital Gains are included as income in your tax return and taxed at your marginal tax rate.

So the expression capital gains ‘tax’ is actually incorrect – there is no separate capital gains tax but you pay income tax on capital gains.

How to calculate a capital gain/loss

Cost Base – this is the cost of the asset (for capital gains purposes). For shares this includes the Cost of the shares and also the brokerage charged.

Proceeds – this is what you received for the sale of the asset. This would usually be cash but could be other assets.  For shares your proceeds would have the brokerage taken out.

 PROCEEDS    LESS  COST BASE   EQUALS CAPITAL GAIN/LOSS

Working out your net capital gain

Capital Gains discount – If you hold an asset for more than 1 year – you are eligible for a 50% discount.

I.e. In the first example above you would make $1,000 cash but would only be taxed on $500 in your tax return.

Capital Losses – If you make a capital loss it can only be offset against other capital gains (either in the same or future years). Capital Losses are applied BEFORE the 50% discount is applied (which sucks as I will show you).

So lets assume example 2 happened either in a previous year or in the same year.

So Example 1 you have a gain of $1,000

Then you apply the losses in Example 2 of $500

You have net capital gains of $500.

Then you apply the 50% discount and reduce the gain by $250

Net $250 capital gain.

But if you applied the discount before the losses you would have no capital gain ($1,000 gain x 50% = $500 – $500 losses = $0).

That is Capital Gains in a nutshell. But read on for the more complex stuff.

Further Resources & Info

Short Version -http://www.ato.gov.au/individuals/content.asp?doc=/content/00191827.htm – Personal Investors guide to Capital Gains 2008/2009

Long Version – http://www.ato.gov.au/individuals/content.asp?doc=/content/00191831.htm – Capital Gains Guide 2009

Other Stuff

http://www.ato.gov.au/corporate/content.asp?doc=/content/47389.htm Capital Gains Tax Checklist

http://www.ato.gov.au/individuals/content.asp?doc=/content/43142.htm – Main Residence Exemption the effect of using your home to produce income

More Complex stuff that you might want to know

The capital gains rules are catch-all provisions. So if something isn’t income it is probably a capital gain.

The CGT rules started in 1985 so assets acquired before this (pre CGT assets) are not taxed as capital gains (though if received through an estate cost base/date will reset to date of death).

* It is possible to have a Share Trading Business (where shares are treated as your inventory/stock).

It is also possible to have a Property Business (say if you are developing) where your property is stock.

 Trying to shortcut the Capital Gains system

“I know – I’ll sell my $500k property to my son for $1” –  Very very bad idea.

Market value substitution of proceeds applies.  So you would be taxed as if you had received $500k and (even worse) your son would only get a cost base of $1 (and would have massive capital gains when he sells).

“I’ll give you shares instead of cash” – Proceeds can be other assets besides cash.

Well, OK it isn’t a present… it is a loan.

The bank has lent me part of the increase in the value of my property.

I bought my unit 3.5 years ago for $315,000. Now, according to the bank valuation it is worth $385,000 (note the property has increased by $70,000 but they have lent me $60,000 – see point one below).

I say this not because I am so smart but to show how property can increase in value (obviously it is not always going to happen like my example).

Also I’d like to show how little I have had to do. Since I bought the unit the only renovation work I have done is put in a new toilet!

I must admit there have been a few visits,  phone calls and letters over the years:

1. Getting the strata to fix a leak from the above bathroom x 2
2. Dealing with tenants – a few visits/phone calls to get things fixed

but aside from this I have simply paid the mortgage each month.

 How long would it have taken me to save this money? FOREVER!

 How it works

 I applied for a loan, and then showed the unit to a valuer acting for the bank.

A few weeks later – the banks have provided the loan documents to sign and are asking me where I want the money. 

With the money I plan to invest in shares- but with a little known twist.  (Stay tuned).

A few points to note

1. Loan to valuation – The banks will usually only loan you a percentage of the valuation (i.e. the maximum loan would be $385,000 x 80%). If you borrow more than 80% you are usually subject to Lender’s mortgage insurance on the whole loan amount.
2. You have to tell the banks what you are planning to do with the money. Although the banks are usually happy to lend you the money for personal things (such as a holiday but see point 3).
3. Whether the interest is tax deductible depends on how the funds are used. (i.e. If you buy shares or property or business, etc. probably deductible  – however not deductible if you spend the money on personal things like repay Credit card or car debts, a holiday, etc.)

Why you shouldn’t pay off your home mortgage when you have a house but invest in assets instead

Ok – now that I have your attention I hear you ask- Why shouldn’t I pay off our home mortgage?- that is what our parents did, isn’t it?

Our parents worked, bought a nice house in the suburbs –and now 25 years later it is paid off (or nearly) and if they sold it they would make a lot of money (which would probably be exempt from capital gains because it has been their main residence the whole time).

Rich people think differently to middle class

So isn’t paying off your mortgage smart financial advice? Well Yes and No.

Paying off your mortgage is a lot better than blowing your money on clothes, coffee and the gym membership (or whatever you spend your money on).

And your accountant will often tell you to pay off your mortgage to reduce non-tax deductible debt (as if you are paying interest – if you can get a tax deduction for it you can get a refund of 30% – or whatever your marginal tax rate is).

An idea that is different to the masses

However –  what if you were to switch your home loan to be interest only and never pay it off?

And with the extra money saved by making principal repayments (which might be a few hundred dollars a month) – buy an investment property (or better yet a few!).

Here’s how it works

Option A- Pay off your home: If you bought your unit/house at 400,000 – in 30 years you would have paid off the home loan. Also the house would have gone up in value. If the house increased by 3.25% a year on average (e.g. year one worth $400k x 3.25% = $413,000, Year 2, $426,423, etc.) by the 30th year it would be worth $889,839 by my calcs. Estimated Home future value.   So your NET WORTH (assets less liabilities) would be $889,839 house (as you have paid off the loan (less property selling costs).

Option B - Invest in More Properties If however you switched your loan to interest only your home would be still worth $889,839   and you would still have the $400,000 loan = so if you sold your home (net home) you would get $489,839 less costs.

BUT WAIT… if you purchased the house next door for 400,000 – then at the end of the day you would have equity on the 2nd property of $489,839.

489,839 x 2 =$979,678 (less selling costs)

Also with the investment property you would be able to claim the negative gearing each year on the property (probably save yourself a few grand of tax each year).

Convincing your banker

It might be a bit harder convincing your banker on this idea.

The drawbacks to this more risky idea

1. You can’t make repayments and have to sell out early

2. You end up worse off (although at 3.25% you end up better off.. and some people say that real estate can go up up to 7% a year)

Other investments rather than property

This also works a bit with shares – but it doesn’t work as well because you don’t get the same leverage as shares. Also with shares there is the risk of trading in and out (for example if you thought the market was still going down and sold in Feb   – you would have missed the large growth in the sharemarket since March 2009.

Now you might own a home but rent it out – depending on whether you play by the rules will determine whether you have to pay tax (and how much).

Reasons to buy a home

1. Forced Savings

To buy a home you need a home loan or mortgage (unless you have saved the whole amount).

And when you are paying a mortgage it is forcing you to slowly pay off your house (the difference between the house and the loan on it is called ‘equity’ – that is the portion you own).

Reasons not to buy a home

1. Locked in to a mortgage

How a mortgage works

Sometimes a picture says a thousand words (so later I’ll let you down loan a loan schedule I have)

Say the bank lends you $250,000 for an apartment.

Interest -The bank charges interest (usually monthly) either at fixed rate = Fixed Loan or in line with the rate they can borrow = Variable Rate on the loan. 

Loan Repayment – The  bank will work out a repayment so that you pay back the loan (usually over 25 or 30 years).  If the interest rate doesn’t change - this repayment will stay the same for the period of the loan.

The loan repayment will pay off the interest charged – and the balance repays part of the loan (called principal). So this is called a ‘principal and interest’ loan (you can also get ‘interest only’ loans).

Mostly interest at the start - At the start of the loan you might only pay $100 a month in principal (given the interest charged every month). However over time as you start to pay the loan off – less interest is charged per month (and you pay more principal).

Time to sign the contract to buy the unit.

The real estate agent came to my parents house a few days later and I (with my parents) reviewed the contract which I signed.

Because in NSW you get a ‘cooling off’ period before you have to pay the  deposit (usually 10% - note other states don’t always get the ‘cooling off’ period) – the real estate also asked that I pay a 0.25% holding deposit on exchange of contacts. This equated to $718.75 which I borrowed from my parents and they wrote a cheque after I signed.

The balance of the 10% deposit ($28,750 less holding deposit) was to be paid after the cooling off period.

What the hell is concrete cancer?

4 Days later I received the faxed Strata report from my conveyancer.

The report included:

- Minutes from the previous strata meetings

- Profit and Loss of the building

- Balance sheet including balance in Administration and Sinking Funds.

see http://www.stratareports.com.au/ for a bit more on what a strata report is.

What I found was a little bit disturbing … OK very disturbing.

1. There was concrete cancer mentioned in the large garage underneath the building.
2. There was $30,000 in the sinking fund.
3. One quote they had to fix the problem was for about $200,000

So what this meant to me is that the Strata would probably have to eventually get rid of this concrete cancer (at huge cost). And given that they didn’t have much in the sinking fund – the amounts would probably have to be raised by a special levy.

Special Levy – owners pay up!

A special levy is a levy which is charged on all unit holders (based on entitlement) usually to assist with a special project/maintenance.

$100,000 divided by 50 units is only $2,000 a unit. However one cost estimate was $200,000!

A hard decision ahead

I spent a few days going back and forward about this. I spoke to guys at work who had bought units – they told me the report was pretty crap.

I spoke to the real estate agent – he mentioned how the ‘real’ quote was probably only $50,000 and that they might not get it fixed for a while anyway.

I think 2 days before I had to tell them I spent about 2 hours talking with my parents about whether to go through with the purchase or not.

Decision made….No Deal

I eventually told the real estate agent/conveyancer who told the sellers solicitors that I wouldn’t be purchasing the unit (and I would forfeit the holding deposit paid).

Costs to me in not buying the unit

- $718.75 Holding deposit paid

- $250? Strata report cost paid for (this was the best money I’ve ever spent)

- $200 extra documents? (I got all the loan/legal documents – can’t remember if the bank charged me a fee when I got the 2nd set of loan documents for the unit I ended up purchasing)

- My time of going back and forward with the real estate agent

- My time costs of having to START AGAIN looking for a unit to buy

Lessons/Benefits of Wisdom:

1. Don’t pay a holding deposit -when I had signed the contract the seller couldn’t sell to anyone else). My mortgage broker actually recommended I not pay the holding deposit.
2. Buy a strata report – in situations like this it can help you to avoid buying a lemon property.

Postscript

It was definitely an experience where I learned a lot. It helped when I purchased a unit a few months later.

I think the unit I didn’t buy has gone up in value. However I think the one I ended up purchasing was a better choice in the end.

Post-Postscript

I never did found out whether they fixed the problem with the unit I almost bought and if they had to issue a special levy to get the problem fixed.

The Unit

Back in February 2006,  I found a 2 bedroom unit near Macquarie Uni in Sydney. The view wasn’t great (the view was of the carpark!) but overall the place was OK. With my parents advice I decided to buy it if the price was right.

Negotiation for the unit

Note that there was usually about 2 days between each phone call (i.e . usually after the real estate agent said ‘no’ I said “I’ll think about it” before submitting next offer 2 days later so that he thought all my offers were serious and gave me time to think of next step)

List Price: The unit was listed for sale for $315k (which means the seller probably wanted $300k as real estate agents usually increase the listing price as buyers like to feel they are getting a discount on the list price)

Offer 1: I think I offered $275k first (something ridiculously low – as what is the harm!), agent takes it to the sellers and comes back and says no.

Offer 2: I probably offered $280k, same process as offer 1, calls back and says No (in the call from the real estate he probably said something  like “the sellers want a lot higher price than what you are offering”  without mentioning a price -because if he said the “sellers want $300k” then I know they might accept less than $300k).

The Serious Offer – Offer 3: I go back few days later and offer $285k – I also state that this is my final offer (you can get burnt doing this but now it is up to the seller to counter offer if they are interested).  I had a good feeling I was the only one in negotiation for the unit which is why I was also happy to say it was my final offer.

Counter Offer 1: Real Estate agent calls and says they want $300k but that the Seller will counter offer $290k (this is where you finally know you are getting somewhere – this means the seller knows the counter offer is the MAXIMUM they are going to get and they have accepted this)

Offer 4: Offer $287,500 – halfway between my last offer of $285k and sellers counter of $290k.  Seller accepts this.

Keys to negotiation

1. Be happy to walk away (I had to keep telling myself that!)

2. Be the only one negotiating – If there were buyers who offered to pay $300k then seller wouldn’t have agreed to negotiate. A good real estate agent will make you feel like there are other people bidding (whether or not there are is anyones guess! – one trick is you say to real estate agent to bring you the top price and I’ll beat it. – then you don’t beat it you match it).

3. Investment of time can work to your advantage – because I had been in negotiations with the seller for about one and a half weeks at this stage – I might not have needed to increase my counter offer from $285k to $287.5k. They might have accepted $285 rather than say no and start the process all over again (they might have been buying another place at the same time, wanted to sell quickly etc.)

4. You can meet in the middle (After the counter offer I could have stuck to my final offer – but I decided to meet them halfway – so that they feel they have negotiated me up). In a Bryce Courtney book ‘The Potato Factory’ they mention ‘leaving a little salt on the bread’. Leave something in the deal so that the seller feels they aren’t getting ripped off, etc.

Postscript – I DIDN’T END UP BUYING THE UNIT!

After all that effort and all those phone calls…..I didn’t end up buying the unit! 

I’ll tell you what happened in the next part of the story in a couple of days.

1. Save before you Spend – Building Wealth

Create an automatic transfer of 10% of your salary into another bank account (such as a high interest account).

It is important to do this when you get paid. You should pay yourself first.

When the gym takes their fee directly from your bank account – do you manage to survive – Yes.  Put in an automatic transfer and don’t ever stop it.

Even if you get a credit card debt. Pay off your credit card debt after the 10% (OK this part is debateable- some prefer to pay credit card debt first).

Saving 10% of your salary is like your parents getting you to eat your vegetables – you will enjoy the financial dessert some day.

Resources

http://nomoney.com.au/2009/09/29/the-one-trick-to-saving/

 - Book: The Richest Man in Babylon by George S Clayton (click on Right hand side to buy through Amazon.com)

2. First Home Saver Account – Saving for A Home

If you are 18 and plan to buy a home -start a First Home Saver account with your local bank.  It is a special account – Commonwealth Bank 4.25% & ANZ have them 4.5%

 You need $1,000 to start, and $1,000 a year deposited over 4 non-consecutive years.

 You get 17% contribution from Government + Bank Interest and only pay 15% tax (automatically deducted & sent to ATO).

 The Traps (MAKE SURE YOU READ THIS) – you need to have deposited $1,000 into the account for 4 years- otherwise it goes into your super fund. So if you buy a house after 2 years then the money is transferred to super.

 So start off slow – You could transfer $100 a month into this account for the first few years then up to $5,000/yr ($416/month) to get max Gov contribution benefit.

 Note that can still get FHOG if it lasts!

 Resources

Fido main site http://www.fido.gov.au/firsthomesaver

 Home Saver Calculator http://www.fido.gov.au/fido/fido.nsf/byheadline/First+home+saver+account+calculator?openDocument

 ATO re: First Home Saver http://www.ato.gov.au/content/downloads/MEI00155253n72406082008.pdf

 First Home Saver accounts

ANZ http://www.anz.com/personal/accounts/savings-accounts/home-saver-account/

 CBA -http://www.commbank.com.au/personal/accounts/firsthomesaver/default.aspx

(Westpac & NAB probably have them too but I couldn’t see when I flicked through their sites – maybe someone from Westpac and NAB want to email me nomoneyau@gmail.com and I’ll update this blog with your links)

 First Home Owner Grant -NSW $7k still available until 30/06/2010

http://www.osr.nsw.gov.au/benefits/first_home/  (Other states check go through fido links)

3. Spend less on having a good time

 Watch what you drink -if possible buy first round or avoid rounds of drinks altogether

 If you are not feeling it – go home or don’t go out

 So many fun things don’t actually cost that much

-Hanging out at a friends house, having a few (a few!!! like 3) drinks at the pub.

-Having coffee

-Going to the beach

 4. You can live cheap without being a tightarse (not sure if they’ll say tightarse on Channel 9 – but I’ll say what I want on my website!)

 A few quick ideas - Buy items on sale or 2^nd hand, Sell unwanted items on www.ebay.com.au, Bring your lunch to work

 5. Clear that debt & don’t make stupid decisions

 If you have a credit card debt make it a priority to pay it off. As credit cards charge 20% that is better than almost any investment.

 Pin your credit card statement to your fridge and look at it whenever you are about to go shopping.

 Don’t enter flexirent, etc.

And while you are asking – why not be OUTRAGEOUS and ask for everything you could have wanted?

One of my favourite property gurus Steve McKnight has a website www.propertyinvesting.com

A bit about Steve McKnight first – he worked as an audit manager (similar to me accountant). His books From 0 to 260+ Properties in 7 Years, (there were previously 2 books From 0 to 130+ in 3.5 and sequel From 0- 260+ in 7 Years which I have at home – these are probably been combined into one) and $1,000,000 in Property in One Year     are very easy to read and VERY practical (to start your own property empire). I have a link through to Amazon to buy the updated version of 0-130 Properties in 3.5 years (however it is not out in the US yet but it is out in Australian bookstores)

Now I’ve just sent them an email. The average joe would ask them to link to my website (which I have done after I have created a link on my site to www.propertyinvesting.com.au). 

But in addition to that I have asked to interview Steve McKnight to give extra suggestions for all you guys (and then of course you’ll have to trot off to the bookstore and buy his book – it is really good).

Maybe a little extra begging might help too…. please Steve… please!!

(Steve – if you are reading this – can you get them to send me the new updated version of the book – I have 2 copies of the old one but it looks like there is a lot of new chapters)

(below are the questions that I’d love to ask him)

Because maybe it will work – I asked to be on A Current Affair on 30 December 2009 – and the show should air tonight (be watching!! 6:30 on channel 9)

How to apply this – BE OUTRAGEOUS and ASK

Some ideas of how to apply this:

1. A friend of mine asked if he could work 4 days a week – his company let him and because they hadn’t given him a salary increase – they kept his pay the same.

2. (Guys) (or girls I suppose) Why not ask out that person that you like?

You may have to show something of value (you may have to show Steve McKnight what a cool website you have, your boss that you are worth being paid 5 days for working 4 days, etc., etc.)

But why not go for it!!!?????

And WHAT DO YOU HAVE TO LOSE????

http://www.smartcompany.com.au/property/20091223-gen-y-miss-out-in-property.html

I had a friend who found a great unit, got bank pre-approval,  had his offer accepted, then WHAM!~….. he was made redundant after contracts had been signed.

Unfortunately the bank wouldn’t give him the loan (despite being pretty employable).

If you have more than 20% deposit this shouldn’t be a problem. Otherwise … might be something you might consider if you are looking for a property and thinking of switching jobs. Banks usually require at least 6 months in the same job.