It takes the average household nine years to save a 20% deposit for their first home, making this one of the biggest barriers to homeownership. We explore the recently announced First Home Loan Deposit Scheme and how it can see you moving into your first home faster.
Getting on the first rung of the property ladder is a goal for many young Australians. But with house prices increasing much faster than household incomes, first home ownership has been a fading dream for many. With an entry-level apartment in Sydney starting at around $560,000 and the need for a 20% deposit, saving up $112,000 can feel like a mountain too hard to climb.
More than half of first homebuyers have needed financial assistance (often from the bank of mum and dad) to get their deposit together. With other average households taking nine to ten years to save the required 20%.
But as we head to the polling booths this weekend, the Government has announced a new First Home Loan Deposit Scheme that promises to make it easier to buy your first home by cutting down the time it takes to save a deposit.
What is the First Home Loan Deposit Scheme?
On 12th May, as part of the election campaign, Prime Minister Scott Morrison announced a new scheme to help Australians purchase their first home. Within hours, the Labor Government had vowed to match the policy.
With the banks tightening their lending criteria over the past year, there has been an inability for many to get finance. With this scheme, first home buyers will be able to purchase properties with deposits of 5% without paying thousands in Lender’s Mortgage Insurance. Essentially, helping young home buyers to get into the market faster by reducing the barrier that a large deposit puts on homeownership.
How will it work?
Traditionally, first home owners needed to save a 20% deposit to buy a home, then lenders started allowing loans based on lower deposits, but you’re still required to pay Lender’s Mortgage Insurance which reduces the funds available to buy your home.
While this is an insurance that you pay, it’s the banks that benefit from the cover. Allowing them to have a level of protection and to reduce the risk of a low deposit property. The introduction of the First Home Loan Deposit Scheme will see the government-backed National Housing Finance and Investment Corporation guarantee the difference between the lower deposit and the 20%. This means you do not have to pay Lender’s Mortgage Insurance, so you will have more money to offer when buying your home.
This would give preference to small banks and non-bank lenders to help boost competition. Buyers would be supported for the life of their home loan, or until they decided to refinance once the value of their property had risen to a level where they have more than 20% equity in their property.
You will, of course, still need to go through the usual process of applying for a loan and having the income to be able to repay the loan.
Who is eligible?
With the plan set to start on 1 January 2020, the following eligibility criteria have been announced so far.
- You’ll need to earn $125,000 or less as a single first home buyer, or $200,000 or less as a couple
- The value of homes eligible under the schemes would be determined on a regional basis, to reflect the different property markets across the country. Greater detail as to what these values would be has not yet been announced.
What’s the catch?
The guarantee is capped to 10,000 loans a year and will be underpinned by $500 million in government money. With more than 100,000 first home buyers entering the market last year only 1 in 10 people in the market will stand to benefit.
There is also a concern that a lower deposit of only 5% will encourage people to take out larger loans. Resulting in higher monthly payments and more interest paid over the life of the loan. So, you need to weigh up the pros and cons of getting into the market sooner or taking the time to save a larger deposit and have a more manageable loan.
We watch with interest
For potential first home buyers who have the income to be able to afford to make repayments on their first home but are being held back due to the time it takes to save a large deposit, the scheme will be welcomed.
Following the weekend’s election, we will be watching with interest as the government provides more details about the scheme. In particular around the value of eligible properties.
If you’re in the market for a first home and getting together a large deposit has been holding you back, it’s now worth revisiting how much you can borrow.
Check out our borrowing power calculator and start planning your first step on the property ladder.