On 1 January, 2020, the federal government is rolling out its First Home Loan Deposit Scheme, an initiative designed to help first home buyers enter the property market more easily.
The new government scheme for first time buyers allows approved applicants to take out a mortgage on a property with only a 5% deposit. Typically, banks and other lenders require buyers to make a minimum deposit of 20% when taking out a mortgage. However, the government has set aside $500 million in equity to underwrite the mortgages of first home buyers. Effectively, this means people who are looking to enter the market for the first time can do it a little faster, cutting down the number of years it takes to save for a larger deposit.
Usually, if a buyer wants to take out a mortgage with a deposit that is less than 20% of the property value, the lender will require them to pay a fee for lenders mortgage insurance. This is insurance that the lender takes out against the risk of the borrower being unable to repay the loan. Since the government is acting as a guarantor on loans taken out under the first home scheme, the lender does not need to ensure the risk. This means that the borrower will avoid the high fees for lenders mortgage insurance. Taking that figure out of the equation, borrowers can make a saving of around $10,000 or more, depending on the size of the loan and the value of the property. By removing the necessity of paying this extra fee, the idea is that first home buyers will be able to enter the market sooner.
Eligibility for the government’s 5% deposit scheme is determined by borrowers’ annual earnings – up to $125,000 for individuals and $200,000 (combined) for couples. The scheme is restricted to 10,000 borrowers each year. There is also a cap on the price of the purchased property, but the cap will vary regionally in order to reflect property prices in each local market. Buyers will be supported by the government’s deposit scheme for the full duration of their mortgage, but they will lose this support if they decide to refinance.
The major benefit of the government’s home deposit scheme is that it cuts down the length of time that first home buyers need to save for a deposit. However, there are also some risks and disadvantages that come along with this. The biggest risk is that, because the balance on the loan is higher with a smaller deposit, borrowers have more work to do to pay it off. The size of repayments will be higher than they would for a loan over the same duration or, alternatively, the mortgage will last longer. With a larger sum owing, there is a greater risk that borrowers will struggle to pay off the loan. As well, borrowers will need to pay more interest over the course of the loan, since the balance against which interest is calculated will be higher.
The government’s first home scheme could be beneficial in helping some people get into the housing market a little sooner, but it is probably not appropriate for everyone. There are some good reasons why lenders usually ask for a 20% deposit, and borrowers looking to take out a mortgage with a smaller deposit should make sure the benefits of entering the market sooner outweigh the risks of owning a larger sum of money.
To find out more about the new First Home Loan Deposit Scheme, read Mortgage Choice’s article here.
By: Mortgage Choice