A new year, a new government scheme. Late in 2019, the Federal Government announced the introduction of a First Home Loan Deposit Scheme which commenced on the 1st January 2020. This new scheme is designed to help eligible first home buyers on low and middle incomes to purchase a home with a deposit as little as 5%.
Initially 10,000 scheme places were made available effective January 1, however a further 10,000 places will be made available from 1 July 2020 for FY2021.
Of the 10,000 places, 5,000 will be made available through two major lenders, being Commonwealth Bank and National Australia Bank, with the balance of 5,000 to be made available through 25 non-major lenders who have been appointed on the panel. Here’s a link listing all participating lenders.
An official government website has been established with full details of the scheme – including an overview, eligibility criteria, property price thresholds, and how to apply.
As you may be aware, anyone borrowing > 80% of the purchase price incurs Lenders Mortgage Insurance (LMI), which is a one-off premium (cost) passed onto you as the borrow. When borrowing > 80% of a the purchase price, lenders take out LMI as you are seen as a riskier borrower given that you don’t have at least 20% deposit to put towards the purchase.
LMI can add up very quickly depending on the loan amount and the gearing level. The higher your gearing ratio the higher the LMI premium. Generally speaking, 95% gearing is the highest you can borrow nowadays for an owner-occupier purchase, and at this level the LMI premium is in the thousands of dollars.
Under this new scheme, first home buyers can borrow up to 95% of the purchase price without incurring the usual LMI premium/cost. The scheme is not a cash payment or a deposit for your home loan, it is designed to guarantee 15% of the purchase price (property value) rather than taking out LMI and paying the usual premium.
Note that a borrower will still need to meet the lenders’ respective borrowing criteria in order to qualify for the desired home loan amount.
Like any new scheme, there is a qualifying criteria. The main criteria to qualify is as follows:
- Must be a residential property (off-the-plan included)
- Must be an Australian citizen or a Permanent resident of Australia
- Must be 18 years or over
- Single applicant earning up to $125,000 taxable income or up to $200,000 for a couple (based on prior FY)
- For couples the scheme only applies for married couple or de-facto relationship couple
- Must have at least a 5% deposit (of the purchase price)
- Only applies for owner-occupied properties (investment properties are excluded)
- Must be a first home buyer who has not previously owned or had an ownership interest in a property in Australia
There is also a price threshold depending on where the property is located. For example, in Victoria the maximum purchase price is $600,000 for capital city properties and regional centres, and $375,000 threshold for the rest of the state.
Note that the existing first home buyer grants and schemes remain in place throughout all States, which includes stamp duty concessions and first home owner grants – refer to firsthome.com.au and make your way to your respective State for further details.
My take on the new scheme…
Like anything new introduced, there are pros and cons.
Clearly, this new scheme is a positive incentive for first home buyers to get a foothold on the property ladder, particularly first home buyers finding it hard to save a bigger deposit while renting.
Getting a foothold on the property ladder sooner also has long-term positive outcomes for first home buyers as they are able to buy much sooner, meaning their long-term wealth could be greater. Time in the market is the secret ingredient to creating more wealth through the power of property – with property having the runs on the board to prove it.
On the flip side, affordability will still be an issue for some as home loan repayments still need to be made.
The main issue I see with this scheme is that it may add further fuel to an already strong market. Demand for properties in the first home buyer price point will increase as this new scheme means that more buyers will be wanting to eat from the same pie – demand will therefore exceed supply and inevitably it will put further pressure on property prices.
In any case, many first home buyers will be rushing to get into the first tranche of 10,000 scheme places as demand from first home buyers will inevitably be high.
I hope the above gives you all the information you need if you’re a first home buyer who would benefit from the new scheme. If you need assistance or guidance, feel free to reach out as we’re ready and willing to assist.
Disclaimer: The Information is general in nature and does not take into account your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the information without first seeking expert financial advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.