First Home Buyer? What you need to know about the First Home Loan Deposit Scheme (FHLDS)
Are you a potential first home buyer? If so the Australian Government’s First Home Loan Deposit Scheme (FHLDS) might be just what you have been waiting for.
The FHLDS is a scheme that has been announced by the Australian Government to enable First Home Buyers to purchase their home faster and mitigate many of the costs involved. The way this FHLDS will work is that the government will guarantee a portion of the deposit required when buying your home.
Conventionally speaking, when purchasing a property, the lender (usually a bank) will require the borrower to provide a deposit of at least 20% of the property value.
For example, a young couple seeking to purchase their first home for $500,000 home would need to save up a deposit of $100,000. The FHLDS would allow them to provide as little as a 5% deposit instead, with the remaining 15% guaranteed by the government. The result of which would be a much smaller upfront deposit of $25,000.
While you can currently purchase a first home with less than a 20% deposit, it will incur the dreaded Lenders Mortgage Insurance (LMI). LMI is insurance that the bank takes out against the loan as it is perceived as “Higher Risk” due to the lower deposit amount held. The result of incurring LMI is a fee payable by you, as well as a higher interest rate applied to the loan.
In the same example as above, home buyers purchasing a home for $500,000 with a 5% deposit would require LMI of approximately $17,000, on top of which borrowers will be slugged with an interest rate 100 basis points higher than an equivalent loan with a 20% deposit.
This is where the FHLDS could really add value for First Home Buyers, as those who are looking to buy and have a deposit of between 5% – 20% would be will be able to avoid LMI and the higher interest rates associated.
This all sounds great, but am I eligible to access the scheme?
You are eligible for the scheme if you are a first home buyer and earning up to $125,000 p.a. as an individual or couples earning up to $200,000 p.a.
The scheme commences on the 1st of January 2020 and is being implemented by the National Housing Finance and Investment Corporation (NHFIC). $500 million will be used to fund up to 10,0000 of these guarantees each year. [Source: NHFIC]
Does it matter where I plan to buy?
There are going to be regional-based caps on purchase prices, in Victoria, for example, Melbourne and regional centres will have a maximum purchase price up to $600,000, whereas homes in the rest of the state will be eligible up to $450,000. This is to ensure that the scheme is only applied to those First Home Buyers looking to buy a modest home. So it is important to understand which caps would apply to you. Visit the NHFIC’s Eligibility page for more details.
There’s nothing quite like hosting your first backyard dinner party in your own home. But before your jump into it, it’s important to be aware of all the fine print and potential pitfalls.
What else should First Home Buyers be aware of?
There are only 10,000 guarantees being offered per year, which represents fewer than 10% of First Home Buyers based on numbers from the previous year.
In conjunction with the $500 million funding limit per year, there is much speculation around the availability of these guarantees, as it appears to be very much a first in first served approach with many First Home Buyers likely to miss out.
There is an argument to be made that this scheme does not actually make housing any more affordable, and could actually negatively contribute to housing affordability issues in the future. This stems from the fact that FHLDS benefits those who are already able to service (afford the repayments and fees) a home loan by reducing the costs associated with LMI but will not actually enable any potential First Home Buyers to secure a loan that could not have done so previously.
For example, if you are a young couple who have been saving diligently for years to buy your first home, and have even set aside the full 20% deposit, if the bank reviews your incomes and deems the scenario unserviceable you will be unable to apply for the loan in spite of the work you have done to save the deposit.
The increased demand for housing may result in inflated house prices along with market fluctuations as buyers and sellers alike anticipate the effects of the scheme. To ensure that you are full bottle on all aspects of buying a home check out this article.
Not sure if the FHLDS is right for you?
The FHLDS is likely to be most beneficial if you already have a 5-20% deposit saved and are about to pull the trigger on buying your first home. However, it’s always important to weigh up all of your options when considering buying a home; this encompasses all aspects of your financial situation. This is where a skilled financial planner can really provide value, have a read of this article to see how the right advice will help you achieve your dreams.
- The Scheme will have a cap of 10,000 First Home Buyers each year
- The Scheme will enable access to housing finance without the need to save a 20 per cent deposit or pay LMI
- Borrowers will face lenders’ usual loan serviceability tests
- The Scheme will be available to First Home Buyers with an income (in the prior financial year) less than $125,000 (or $200,000 combined income)
- Support will be targeted by setting maximum dwelling prices, set on a regional basis.
- NHFIC will implement the Scheme
- The Scheme will commence on 1 January 2020