How does the First Home Loan Deposit Scheme work?
The Australian Government new initiative to give first home buyers an improved opportunity of buying their first property is due to launch in on 1 January 2020. The Federal Government’s initiative is designed to help eligible Australian First Home Buyers with deposits as low as 5% to get a loan. This scheme has been designed to bridge the gap with buyers who have low deposits.
First Home buyers experience issues such as : too small a deposit, not having enough of a deposit to avoid LMI (Lenders Mortgage Insurance), property prices keep growing which prevent them getting on the property ladder and remains a concern for government and want to be purchasers.
A novel way of achieving this is the strategy by Federal Government to introduce ‘Caps’ on eligible property values across different parts of Australia where these caps are aligned to the average purchase price of that city (median price) to help first home buyers enter the property market sooner with only a 5% home deposit. And to avoid high LMI costs the government in essence will stand as guarantor for you the purchaser.
Technically, what is the First Home Loan Deposit Scheme?
The First Home Loan Deposit Scheme is a government guarantee which will secure the mortgages of some eligible first home buyers with deposits as low as 5%, who otherwise might not be able to get a loan without paying LMI. The government will essentially act as a guarantor, securing the remaining deposit to bring the borrower up to 20%.
If you are eligible and only have a 5% deposit you would still be borrowing and have to pay back the other 95%, plus interest, to your lender. However, the scheme means that eligible borrowers could get a loan faster and would avoid having to pay for lenders’ mortgage insurance which is usually required on loans taken out with a deposit below 20%.
The government would only guarantee a successful applicant’s first loan to be eligible.
Do I qualify?
A First Home Buyer with an income of up to $125,000 will be eligible to apply for the scheme. For couples, the income limit will be a combined $200,000, and the scheme will only be available where both partners are first home buyers. Eligible applicants will need to have saved up a home deposit of at least 5% and up to 20%, also needing to meet their lender’s application criteria.
The guarantee is limited to 10,000 first home buyers each year, less than 10% of the total number of first homes purchased in Australia in 2018. According to Finance Minister, Mathias Cormann, the scheme will operate on a “first in, best dressed” basis, with “no specific number of guarantees per jurisdiction”.
What are the First Home Loan Deposit Scheme property value caps by state.
The maximum eligible property price under the scheme will be different in the various states and territories. Within states, caps will also vary between the capital city/regional centres (with a population in excess of 250,000) and the rest of the state.
| State/territory | Capital city and regional centres | Rest of state |
|---|---|---|
| NSW | $700,000 | $450,000 |
| VIC | $600,000 | $375,000 |
| QLD | $475,000 | $400,000 |
| WA | $400,000 | $300,000 |
| SA | $400,000 | $250,000 |
| TAS | $400,000 | $300,000 |
| ACT | $500,000 | – |
| NT | $375,000 | – |
Source: Minister for Housing Assistant Treasurer
In anticipation of the scheme’s launch, the NHFIC ( National Housing Finance and Investment Corporation) undertook a“ detailed consultations with lenders regarding their potential participation” and says that more than 100 residential mortgage lenders and took part in the process. Details of participating lenders have yet to be announced.
What are my risks?
Only having a low deposit on hand means having the requirement to pay back more to the bank in terms of loan repayments and amounts. Meaning if you only have a 5% deposit, you will require a 90% loan compared to a 20% deposit only requiring an 80% loan.
By taking on more debt you would be aware that you will be paying more interest over the life of the loan
Another factor of having very little equity in the property means refinancing at a time in the future may be very difficult to switch to a new lender for lower rates.
If property values do decline during this period refinancing will be impossible and your current exposure to your lender will increase.
Having a lower deposit may limit who you would be eligible to apply for your home loan with as not all banks will take part lending to buyers under the First Home Loan Deposit Scheme. And those that do lend may have higher interest rates (and or ongoing fees within the loan) resulting in more out of your pocket to fund the purchase.
Applying for the FHLDS
The NHFIC has not announce how their application process might work, further details are expected as launch date is 1 January 2020
All information shared with you in this article is general in nature and you may need financial advice from a qualified adviser or government web sites and details may change prior to and during the launch of the FHLDS