First Home Loan Deposit Scheme - Starts 1st January 2020
Saving a deposit for a mortgage is often the biggest hurdle for many first home buyers. Rising property prices in some areas in Australia means it can take years to save up enough of a deposit. Add to that the cost of Lenders Mortgage Insurance (LMI) and it’s easy to see why so many first home buyers struggle to get a foot onto the property ladder.
But that’s all about to change with a Government scheme aimed at helping more first home buyers.
A much-needed leg-up
From 1 January 2020, eligible Australian first home buyers with a 5 per cent deposit can get a home loan without Lenders Mortgage Insurance (LMI) through a Government scheme.
At present, first home buyers typically need a 20 per cent deposit in order to avoid paying mortgage insurance. Under the Coalition’s scheme, eligible first home buyers would only need a 5 per cent deposit, with the Government guaranteeing the rest and covering the mortgage insurance under a special loan.
Borrowers would still need to go through the usual checks and balances when applying for a home loan and will eventually repay their loan as usual.
Benefits and eligibility
While it is currently possible to secure a home loan with a 5 per cent deposit, lenders will typically charge LMI when borrowing more than 80 per cent of a property’s value. And LMI is expensive: on a $400,000 mortgage with a 5 per cent deposit ($20,000), LMI would be as much as $12,768 (an estimate from Genworth’s LMI premium estimator).
With the Government’s First Home Loan Deposit Scheme this cost is removed, effectively clearing a sizeable obstacle for first home buyers – not only will the scheme save you money, it will also save you time allowing you to get into the property market much quicker instead of having to wait until you’ve saved enough to cover your deposit and LMI.
Eligibility to the scheme is limited to first home buyers earning $125,000 a year or less – $200,000 for a couple – up to the first 10,000 borrowers. Along with the First Home Loan Deposit Scheme, most states offer first home owner grants and stamp duty concessions so it’s worthwhile researching what’s available to you.
Property Value caps
To be eligible for the scheme you must be purchasing a property valued at or below the following thresholds:
* A regional centre is defined as a city with a population above 250,000, such as Newcastle,Woolongong or Geelong.
Will the First Home Loan Deposit Scheme really help first home buyers?
This is a tricky question to answer and experts are split on the issue. Avoiding LMI and buying faster definitely removes an obstacle for first home buyers.
But LMI can be capitalised onto your loan, meaning you borrow it with your loan and pay it back over time. The people benefiting from the scheme are those who would probably be able to buy a property regardless.
Limiting the scheme to 10,000 borrowers further reduces its overall effectiveness. Consider that more than 8,000 first home buyers took out mortgages in March 2019 (according to the ABS).
There is a risk in borrowing 95% in a falling market
If property prices fall and you buy a home with a 5% deposit you risk ending up in negative equity. This is when your mortgage ends up being bigger than the value of the property.
Having negative equity makes it harder to sell your property or refinance. But if you keep paying off the loan principal and property prices rise you should be OK in the long run.
• If you’ve saved 5 per cent of the purchase price of your property, the government will guarantee the remaining 15 per cent of the deposit.
• You will still need to borrow 95 per cent, but you can avoid LMI.
• Eligible first home buyers can’t be earning more than $125,000 a year ($200,000 for couples).
• Access to the scheme is limited to 10,000 borrowers.
• The value of eligible homes under the scheme will vary by region.
• The scheme starts on 1 January 2020.
• The scheme will make low deposit home loans cheaper. The scheme will be administered through the National Housing Finance and Investment Corporation (NHFIC) in partnership with lenders. In an announcement, the Government said it would prioritise “smaller lenders to boost competition”.
Are you likely to qualify?
Want to get an idea of whether you’re likely to qualify for the Government’s new 5% deposit scheme?
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Regardless of your eligibility, the Pivotal Financial team would love to help you with your financial objectives. Call us on 07 3007 9088 and book an appointment today.
If you need advice around buying your first home or you’re considering growing your property portfolio with an investment property, it’s worthwhile talking to our team of brokers about your finance needs. Contact Pivotal Financial today and we’ll put you in touch with a local broker who can meet you at a time that suits you.