For many people, the hardest part about buying a first home is coming up with the deposit. The general requirement is that you have 20% of the purchase price saved in addition to additional costs like stamp duty and conveyancing or solicitor’s fees. Some lenders will approve loans with a smaller deposit, but there are additional hoops to jump through, and you will usually be required to take out Lenders Mortgage Insurance (LMI).
With the national median house price hovering at around $750,000 as of last quarter, that can mean coming up with a deposit of $150,000. Domain’s 2018 First Home Buyers Report found that in Melbourne and Sydney, the average time needed to save for a house deposit was six years, with the most affordable market, Adelaide, still requiring between three and four years of saving.
To make entry into the housing market easier, the Federal Government has announced a First Home Loan Deposit Scheme which will come into effect on 1 January 2020. Prime Minister Scott Morrison has stated that he hopes the scheme will cut the time needed to save for a deposit by at least half.
Here’s what you need to know:
• The scheme is open to borrowers who have not bought property before, and who have an income that doesn’t exceed $125,000 for a single buyer or $200,000 for a couple.
• The scheme is limited to 10,000 borrowers; roughly 10% of the 110,000 first home buyers who bought in 2018.
• It may also be subject to caps on the value of the home to ensure that borrowers don’t over-extend. The caps will be regionally based and have not yet been set in stone.
• Under the Scheme, if you’ve saved 5% of the purchase price of your property the government will guarantee the remaining 15% of the deposit. This means that the lender will not require you to take out LMI. Although you will still need to borrow 95% of the purchase price to make up the difference, the guarantee will mean that lenders will treat you as if you have a 20% deposit for the purposes of their risk assessment.
• The Scheme will be administered through the National Housing Finance and Investment Corporation in partnership with lenders. The government intends to prioritise smaller lenders to boost competition.
• The government guarantee lasts until the equity of the home increases to the point where the loan to value ratio is 80% or less. At that stage, the home owner will refinance and the government guarantee ceases to take effect.
If you’re thinking of taking up the offer, be aware that borrowing 95% of the purchase price is always a riskier proposition than borrowing 80%. It has the potential to add years to the life of your loan if you make minimum repayments. Borrowers should also be sure that they can continue to service the loan if interest rates rise from their current historic low.
However, for those who have a steady income and sensible financial habits, the First Home Loan Deposit Scheme might be just what they need to help clear that first hurdle to home ownership. If you’re interested in finding out more, always seek the advice of a finance professional to ensure that you understand the implications of the scheme.