Government scheme will help first home buyers with 5% deposits enter the market

Richard Whitten 13 May 2019 NEWS

Picture not described: HomeBuyingCouple_GettyImages_738x410.jpg Image: Getty Images

The First Home Loan Deposit Scheme will let new buyers borrow 95% and avoid paying thousands in lenders mortgage insurance premiums.

In the final days of the 2019 federal election the government has announced a specific policy to help first home buyers enter the market.

The First Home Loan Deposit Scheme will allow borrowers who've saved a 5% deposit to get a mortgage without needing to save a 20% deposit and also avoid paying lenders mortgage insurance premiums (LMI).

Avoiding LMI is what makes this scheme significant. Many lenders offer 95% home loans that only require a 5% deposit. But you usually have to pay LMI on top of that.

The First Home Loan Deposit Scheme: What we know so far

  • The scheme starts on 1 January 2020.
  • 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 government said in its press release that the scheme could help borrowers save "around $10,000" in premiums.

This is largely accurate. If you take a 30 year mortgage borrowing the average Australian home loan ($384,700) with a 5% deposit your LMI costs would be around $12,279 according to Genworth's LMI premium estimator.

The government called this "a significant leg up" that would "slash the size of a home loan deposit". That statement is somewhat less accurate.

Mortgages with 5% deposits already exist and are quite common. But the scheme will make these mortgages cheaper. The LMI saving is significant, but borrowers are already able to capitalise their LMI premium (borrow it along with the loan and repay it over time). This means LMI isn't necessarily an upfront cost stopping first home buyers from entering the market.

The opposition immediately announced that it would match the government and implement the same or similar scheme in addition to its other housing policy proposal.

The government's scheme will be delivered through the National Housing Finance and Investment Corporation, which will deliver the scheme along with private lenders. Smaller lenders will be prioritised in order to "boost competition".

Check out our 2019 Federal Election housing policy round-up for more information about the housing and property policies that the major parties are taking to the election.

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