What is the First Home Loan Deposit Scheme?
The government’s scheme is designed to allow easier and faster access to the property market for first home buyers. The scheme will do this by allowing first time buyers to pay a deposit as little as 5%, while avoiding lenders mortgage insurance (LMI). Most banks and lenders require a minimum deposit of 20% of the property’s value for the borrower to be exempt from LMI. The scheme allows first home buyers who can’t reach this threshold to take out a loan if they have saved at least 5% of the value of the property they are buying. The government will underwrite the loan so that borrowers do not have to pay LMI.
Start Date: 1 January, 2020
Eligibility: Singles earning less than $125,000, couples less than $200,000
Minimum Deposit Required: 5%
Property Price Cap: Dependent on region (see below)
Administering Body: National Housing Finance and Investment Corporation (NHFIC)
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How does it work?
You will need to apply to the scheme’s administering body (NHFIC) and demonstrate your eligibility. If you are approved, you can then take out a home loan with a lender and the government will act as your guarantor. Although your lender will still do their normal checks on your financial situation, this will make it easier to get a loan without having saved for a 20% deposit.
Usually, if a lender decides to approve a loan with a deposit of less than 20%, they will require the borrower to pay what’s called lenders mortgage insurance (LMI). This is a form of insurance that the lender takes out so as to cover the risk of the borrower being unable to repay the mortgage. Because the government is serving as guarantor on the loan, there is no need for the bank to take out insurance. LMI can be quite expensive, depending on the size of the deposit, the size of the loan, and the terms of the lender. The government says you could save around $10,000 on LMI, but the amount you actually save will be dependent on the particulars of your loan. Also, if you had previously planned to save for a 20% deposit, you would not have had to pay LMI, in any event.
If you take out a home loan under the scheme, you will then receive support for the duration of the loan. However, if you refinance your home, you will no longer be eligible for support. Also, if you refinance your home and you still owe more than 80% of the value of the property, you will likely need to pay the fee for lenders mortgage insurance with your new lender.
The government’s deposit scheme can also be used alongside its First Home Super Saver Scheme. The Super Saver Scheme allows home buyers to withdraw voluntary superannuation contributions they have made to their super fund, and to put this money towards a deposit on a property. So, if you have made voluntary super contributions (of up to $15,000 per financial year), you can withdraw that money to take advantage of the government’s 5% deposit offer. The limit you can withdraw is $30,000 for singles and $60,000 for couples.
There is a risk in taking out a loan with a smaller deposit, since the amount left owing is obviously going to be larger. Because of this, your mortgage might end up lasting longer than it otherwise would. The standard maximum loan term is 30 years, and your mortgage is not likely to be extended beyond this. However, if you are to take out a larger loan over the same loan term, your minimum repayments will obviously need to be larger. This means that a mortgage taken out under the government’s 5% deposit scheme could put more pressure on borrowers and make it harder to pay back a home loan.
The other drawback of the government’s home ownership scheme is that borrowers will have to pay more total interest over the course of the loan. Since the deposit will be smaller, the amount against which interest is calculated will be greater. This might affect borrowers less if they are expecting their earnings to increase substantially during their career, in which case they could accelerate the repayment of their loan. However, lenders may charge extra fees for making additional repayments on fixed rate home loans in excess of allowable annual limits.
Am I eligible for the new First Home Owner Scheme?
The scheme is open to individuals who are earning up to $125,000 per year, as well as couples with combined earnings of up to $200,000. To be eligible, first home buyers must show that they have saved at least 5% of the value of the property they are purchasing.
The government has also capped the number of homebuyers it will support at 10,000 per year, which means a relatively small number of people will benefit (more than 110,000 first homes were bought in 2018).
Not all properties will be eligible to be purchased under the government’s home deposit scheme. The scheme will only underwrite loans for ‘entry properties’, excluding high-value properties. There is no fixed maximum value for properties eligible under the scheme, as price caps will be determined relative to the property’s local market. You will need to check what the property price cap is in your area.
How will I apply for the new allowance?
The scheme will be administered by the National Housing Finance and Investment Corporation, and applications will need to be made through this institution. Applications have not yet opened, however. The NHFIC will provide further details on the application procedure, eligibility assessment, and regional price caps closer to the scheme’s start date of 1 January, 2020.