It often take years for the average household to save 20% deposit for their first home to avoid paying Lender’s Mortgage Insurance (LMI).
As a way to help first home buyers get into the market, the government has announced a new scheme which promises to drastically reduce that time by lowering the deposit required to just 5%.
We’ve been fielding lots of questions about this new scheme – like the ones below – so thought it would be helpful to share our responses here.
Can this help me get into my first home sooner?
Maybe. As it currently stands, it is possible to buy a home with only a 5% deposit.
However, if you’ve got less than 20% deposit you’ll generally need to pay LMI. (Some lenders waive LMI premiums for borrowers who meet specific employment criteria – make sure you talk to us to find out if your profession qualifies for an LMI waiver).
Under the new scheme, the government would guarantee the additional amount required to reach the 20% target, thereby removing the need for LMI.
What is Lenders Mortgage Insurance anyway?
In a nutshell, LMI is insurance that protects the lender if you have issues repaying your loan. It’s insurance that protects the lender, but you pay the premium.
You can read all about LMI here.
How exactly will the “government guarantee the additional amount”?
Good question!
There’s not a lot of detailed information yet about how this scheme will actually work.
The easiest way to explain how it *could* work is to compare it to a parental guarantee (or family guarantee) loan. A parental guarantee loan is where a parent offers up equity in their existing property as additional security for your loan. By adding to the collateral used by the lender to secure your loan, it has the effect of lowering the 20% cash amount required.
Again, we must re-iterate that we don’t yet know the precise structure of this scheme. However, from what we can gather it sounds like the National Housing Finance and Investment Corporation would guarantee the remainder of the deposit on behalf of first home borrowers under the scheme.
How would this work with lenders?
If we look to previous government led lending schemes (like Land Rent for example), it’s likely that only some lenders will be involved.
And it goes without saying that the lender would still need to undertake a normal credit check process to ensure you’re in a position to afford the repayments on your loan.
It’s unclear as to what restrictions may be in place with regards to topping up, fixing or refinancing your loan – especially if your property doesn’t increase in value as quickly as expected (to allow for the removal of the government guarantee)
With parental guarantee loans for example, the guarantee remains in place until a) your property increases in value or b) you pay your loan down or c) a combination of property values increasing and you paying off your loan occurs so your loan is no more than 80% of your property value.
Can every first home buyer access the scheme?
We know that eligible first home buyers can’t have earned more than $125,000 in the previous financial year, or $200,000 for couples (and both need to be first home buyers). We also know that ‘the value of homes that can be purchased under the scheme will be determined on a regional basis.’ It’s uncertain whether there will be other eligibility requirements that apply.
We also know – and this is a big one – that the First Home Loan Deposit Scheme will be limited to 10,000 first home buyer loans each year. This represents approximately 10 per cent of the Australians who bought their first home last year. There’s been no indication of how applicants for the scheme will be assessed or prioritised.
Should you wait until the scheme is introduced before you buy your first home?
The scheme is due to commence on 1 January 2020. But without all the details, it’s difficult to determine whether a) you will qualify for it and b) how much benefit the scheme will provide to you personally.
We’ll know more as further details emerge.
But in the meantime, if you’re finding it hard to reach your goal of having 20% deposit, here’s a few other ways to get into the property market.
Disclaimer: This article was posted 22 May 2019 and summarises information that has been released about the first home buyers deposit scheme up until this date. The content of this article is general in nature and is presented for informative purposes. Before taking any action, consider your own particular circumstances and seek professional advice.
You can find updated information – as at Oct 23 – about the FHGS here.
