Banks and other financial institutions are offering a new type of savings product - the first home saver account. Designed by the Australian Government to make it easier for people to save a home-loan deposit and launched on October 1, the accounts provide a combination of concessional tax on interest earned and a Government contribution. The Australian Prudential Regulation Authority has, so far, received notification from 19 financial institutions that plan to provide first-home saver accounts. ANZ and Commonwealth are the only big banks ready to go. Others include AMP Banking, Laiki Bank and several credit unions.

Critics of the Government's initiative are sceptical that the accounts will attract much business but competitive rates of 7 per cent or more indicate that financial institutions believe there will be interest and they are keen to get their share.

AMP Banking has taken the most aggressive approach among the banks. It is paying an introductory rate of 8 per cent to the end of December and an ongoing rate of 7 per cent.

ANZ is paying 6.99 per cent but has structured the account along the lines of a bonus saver. To get 6.99 per cent, customers will have to make monthly deposits.

Commonwealth Bank is providing 6.5 per cent. Hunter United Credit Union is providing the highest rate so far, 7.07 per cent.

Banking industry research group Cannex reports that only a handful of financial institutions had provided their account details by October 1. This may reflect some uncertainty about how to set rates for the new product.

Conditions have to be met before an individual can open an account. Customers must be aged between 18 and 65 and be first-time home buyers.

To qualify for the concessions, the customer must make personal after-tax contributions (deposits cannot be made by salary sacrifice) of at least $1000 a year over four financial years. However, they do not need to be consecutive years.

Account balances are capped at $75,000 (that amount will be indexed). A customer can operate only one account at a time.

Interest earned on account balances will be taxed at 15 per cent (interest earnings are usually taxed at marginal rates). The tax will be paid by the account provider and not the customer.

The Government will contribute 17 per cent on the first $5000 deposited each year over four years, meaning account-holders can qualify for up to $3400 from the Government.

Withdrawals are tax free and can be made for one of two purposes: to buy or build a first home in which to live; or to transfer into a superannuation fund if, due to circumstances, a home is not going to be bought.

People who save their home-loan deposits using a first-home saver account may also be eligible for the first home owner grant of $7000.

Robert Slocombe, the head of product, marketing and strategy at AMP Banking, says the group's financial planners see the account as a useful tool for working with younger clients who are developing a savings plan.

Slocombe says AMP decided it could provide a high rate on the account because it will not have to recover the costs involved in running a standard transaction account.

Michael Cant, the executive general manager of retail products at Commonwealth Bank, says the Australian Bureau of Statistics estimated that 129,000 people were looking to buy their first home in the 2007-08 financial year.

Cant says about 30,000 of those had savings accounts with the CBA and were potential candidates for a first home saver account.

Bankers agree the hard part for first-home buyers will be meeting the four-year rule - $1000 a year minimum contributions in four separate financial years. Not many people sit down and start organising their home purchase four years out.

"It needs some planning if people are going to take advantage of this," Slocombe says.

The other problem with the four-year rule is that it robs the account holder of the flexibility to take advantage of a buying opportunity.

Another challenge for the institutions entering the new market is that consumer awareness is low.

The broker Mortgage Choice released the results of a homebuyer survey that shows 13 per cent of respondents had never heard of the scheme and 29 per cent had heard of it but did not know much about it.

Only 20 per cent thought it was a good idea.

Among the financial institutions that have brought products to market so far, none is charging administration fees.

ANZ has taken the most unusual approach, adding a bonus saver feature to its account.

Its first-home saver account has a base rate of just 0.01 per cent but if account-holders make a deposit of at least $10 a month they will qualify for the bonus rate, which is 6.99 per cent.

An ANZ spokesperson says the idea of offering bonus interest in this way is to provide customers with a further incentive to save.

Controversial move

The first home saver account has been a controversial initiative, with many critics arguing the Federal Government first needs to deal with the basic issue, which is a shortage of housing.

The National Institute of Accountants has argued that the new accounts could make affordability worse, not better, for first home buyers. The NIA says: "The first home saver account may result in further price increases as it provides more potential buyers with greater access to funding without affecting supply. There is a fundamental lack of supply of the right type of housing in the right locations."

FIRST HOME SAVER ACCOUNTS                                               
Institution             Rate %          Account fees    Conditions
AMP Banking             7               None            8% bonus rate until December
ANZ*                    0.01/6.99               None            Min monthly deposit
Commonwealth Bank       6.5             None            None
Hunter United Credit Union      7.07            $30 acc closure Min opening deposit
NSW Teachers Credit Union       7               None            None
MyState Financial               7.5             None            Min opening deposit
Big Sky Credit Union            6.9             None            None
* MIN MONTHY DEPOSIT REQUIRED FOR HIGHER RATE                                           
SOURCE: CANNEX                                          
FIRST HOME SAVER ACCOUNTS                                               
How the concessions add up                                              
Annual contributions of $10,000                                         
Year    FHSA    Savings account                         
1       $11,175 $10,221                         
2       $23,020 $20,863                         
3       $35,575 $31,945                         
4       $48,882 $43,484