First Home Loan Deposit Scheme
From 1 January 2020, eligible Australian first home buyers with a 5% deposit can get home loans without lenders mortgage insurance (LMI) through a government scheme.
The federal government's First Home Loan Deposit Scheme will make it easier by guaranteeing mortgages for first home buyers who have only saved a 5% deposit. Here's how it works.
The First Home Loan Deposit Scheme explained
- If you've saved 5% of the purchase price of your property the government will guarantee the remaining 15% of the deposit.
- You will still need to borrow 95%, but you can avoid LMI.
- Eligible first home buyers can't be earning more than $125,000 a year ($200,000 for couples).
- Access to the scheme is limited to 10,000 borrowers.
- The value of eligible homes under the scheme will vary by region.
- The scheme starts on 1 January 2020.
The scheme will make low deposit home loans cheaper. The scheme will be administered through the National Housing Finance and Investment Corporation (NHFIC) in partnership with lenders. In an announcement, the government said it would prioritise "smaller lenders to boost competition".
We can expect more details about the scheme to be announced before it launches.
What are the benefits of the scheme and who is eligible?
5% deposit home loans already exist, but you generally need to pay LMI when borrowing more than 80% of a property's value.
LMI can be expensive. If you bought a $400,000 property with a 5% deposit ($20,000) you'd be looking at a $12,768 LMI premium. That's an estimate taken from Genworth's LMI premium estimator.
The First Home Loan Deposit Scheme removes this cost, so you're saving money and also time. You can save a 5% deposit in a quarter of the time it would take to save 20%, after all.
You will need to be a first home buyer (and if you own an investment property you won't be eligible). You need to be earning $125,000 ($200,000 for a couple) a year or less.
The scheme is limited to 10,000 borrowers.
Will the First Home Loan Deposit Scheme really help first home buyers?
This is a trickier question to answer and experts are split on the issue. Avoiding LMI and buying faster definitely removes an obstacle for first home buyers.
But LMI can be capitalised onto your loan, meaning you borrow it with your loan and pay it back over time. The people benefiting from the scheme are those who would probably be able to buy a property regardless. In other words, people who are currently struggling to save a deposit won't be much better off.
Limiting the scheme to 10,000 borrowers further reduces its overall effectiveness. Consider that more than 8,000 first home buyers took out mortgages in March 2019 (according to the ABS).
There is a risk in borrowing 95% in a falling market
Property prices are falling. This is good news for first home buyers but it poses a risk when your deposit is only 5%. If prices continue falling after you buy the property then you risk ending up in negative equity. This is when your mortgage ends up being bigger than the value of the property.
Are there other government schemes to help me buy a home?
At the state and territory level most governments offer:
- First home owner grants. This is a grant of money that can be used towards your purchase and is often reserved for first home buyers purchasing newly built properties.
- Stamp duty concessions. Many governments waive or discount stamp duty for first home buyers, removing one of the bigger property costs.
Federally, there is another government scheme called the First Home Super Saver Scheme. This scheme allows you to make extra contributions to your super and then withdraw them to use for a home loan deposit, with tax minimisation benefits for doing so.
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