The government have announced they will help first home buyers enter the property market with the proposed First Home Loan Deposit Scheme.

Commencing on January 1st, 2020 the scheme will enable eligible first home buyers to buy a house with as little as 5% deposit. Under the scheme, borrowers will not have to pay Lenders Mortgage Insurance (LMI).

How is the scheme different to low deposit home loans already available on the market?

 You may be thinking: ‘Hold up a sec Carl, I thought there were already plenty of banks and lenders that were willing to accept 5% deposit’. Well yes, that’s correct, however currently for deposits under 20%, LMI applies.

LMI provides protection to the lender in case you default on your home loan. It’s a one-off charge that usually gets included in your loan amount. Check out my post explaining LMI for more information.

How will the First Home Loan Deposit Scheme help first home buyers enter the property market?

Most banks and lenders prefer a 20% deposit. Saving a 20% deposit isn’t realistic for many of my clients, because they have families to support and are paying rent. Some lenders will accept as little as 5% deposit, but LMI will apply.

So, if you’re looking at paying a 20% deposit, it’s 20% of the cost of the property. If you’re purchasing a property for $500,000, a 20% deposit would be $100,000. If you only want to pay 5% deposit for that $500,000 property, your deposit would be $25,000. Saving $25,000 is more realistic for many families.

How will the scheme work?

The scheme will enable eligible first home buyers to buy a house with as little as 5% deposit.  Currently, lenders require a 20% deposit and apply LMI to any deposits under 20%. The government are guaranteeing the remaining 15%. They’re not paying the remaining 15% upfront to the bank. The government will only be liable for the guaranteed amount if the borrower defaults.

Who’s eligible for the First Home Loan Deposit Scheme?

The scheme is limited to 10,000 first home-buyers. The details of who is eligible for the scheme are still unclear. I can’t find a definitive answer around the value of homes that can be purchased under the scheme. Prime minister Scott Morrison has commented this will be “determined on a regional basis, reflecting the different property markets across Australia.”

To be eligible you need to earn under $125,000 (for singles) $200,000 (for couples). The government guarantee only lasts until you refinance your home loan. You still need to meet lending criteria to ensure you can meet repayments.

Where’s the money coming from to fund the scheme?

 The government will set aside $500 million of equity through the National Housing Finance and Investment Corporation to guarantee the remaining deposit on the loans under the scheme.

What are my thoughts on the First Home Loan Deposit scheme?

Any proposal that assists first home buyers to enter the property market is welcome news.

I like that the First Home Loan Deposit Scheme, will prioritise smaller lenders. Prioritising smaller lenders will hopefully boost competition beyond the big four banks. Being a Mortgage Broker, I’m all about competition. A competitive mortgage market means that lenders are fighting to attract borrowers. Lenders fighting for your business means greater choice for you, the borrower. Which makes it easier for me to find you a better home loan deal.

I’m a big advocate of responsible lending and borrowing. So long as you’re borrowing within your means and can comfortably afford repayments, paying a smaller deposit to get into the property market sooner is a great option.

 Carl

 

Carl Violeta is Violeta Finance’s Mortgage and Finance Broker, a proud member of the Mortgage & Finance Association of Australia (MFAA), Finance Expert contributor for Kids Magazine and Peninsula Kids Magazine and the presenter of the Finance Segment of RPPFM’s Dream Home Movement live show and podcast. Contact Carl on 0424 849 034 or email carl@violetafinance.com.au

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