The First Home Loan Deposit Scheme is an initiative by the Australian Government which assists first home buyers purchase a home sooner.
This scheme, funded by the National Housing Finance and Investment Corporation (NHFIC) assists first home buyers by providing them with a guarantee that will allow them to purchase a home with a deposit of as little as 5 per cent, without the need to pay Lenders Mortgage Insurance (LMI).
LMI typically adds an extra $5,000 to $15,000 to the cost of borrowing, so the potential savings are not insignificant.
10,000 places are being released this financial year; 3,000 were snapped up during January alone (month 1 of the scheme), and a further 7,000 are now being released.
If anyone who secured one of the early spaces ends up not being approved for their loan, then those spaces will become available again.
Borrowers have 10 days to secure pre-approval, and then a further 90 days to buy a property.
A further 10,000 places will be made available in the FY2021 financial years (exact timing has not been confirmed yet).
The scheme is well intentioned, however there are a number of limitations. We explain further below…
Who is eligible?
- Singles applying to have to be 18 years or older, first homeowners, they need to be earning less than $125,000 and be intending to live in the property.
- Couples applying must both be 18 years or older, first homeowners, they need to be earning less than $200,000 and be intending to live in the property.
Buyers are also limited to specific maximum purchase prices which are subject to suburb and postcode.
Price limits apply of $700,000 in Sydney and $600,000 in Melbourne. Other cities and regional centres have lower caps.
Buyers must also be aware that they may only get a loan which is principal and interest, interest only loans are not acceptable under this scheme.
There are several criteria used to establish eligibility under the scheme:
- An income test -This test assesses your taxable income for the previous financial year
- A prior property ownership test – This test checks and ensures you have never owned any land/ property before
- A minimum age test – this test makes sure you are 18 years or older
- A deposit requirement – This test checks to see if singles and couples have at least 5% of their deposit saved (If you have 20% or more saved, then your home loan will not be covered by the Scheme, the scheme wouldn’t be required)
- An owner-occupier requirement – This test checks that the property to be purchased is owner occupied only, investment properties will not be eligible
- Citizenship test – This test checks to see if you are an Australian Citizen (Permanent residents are not eligible)
If you do not meet the above criteria then you will not qualify.
What type of properties can be purchased under the scheme?
- An existing house, townhouse or unit
- A house and land package
- Land together with a separate contract to build a home
- An off the plan apartment or townhouse
Which lenders are participating in this scheme?
Both NAB and CBA offered loans under the scheme from 1 January 2020. There are also 25 non-major lenders who started at the beginning of February 2020, so there are lots of options.
Which factors should you consider when choosing an appropriate lender?
We can show you the various lenders participating in the scheme, and go through the pros and cons of the various options for you. Some of the key factors to consider include the following:
- Sharp interest rate (you can expect roughly 2.90-3.15% ‘variable’, at the time of writing)
- Special features, for example offset or redraw, or the ability to fix or to have Interest Only repayments
- Fees and other charges, including establishment fees, and also ongoing fees
- Incentive packages
- Promotional deals
- Customer service/ speed of service
- Internet banking and mobile banking apps
What to watch out for?
The scheme is well intentioned but borrowers should keep in mind that the amount they no longer need to save, they will now have to borrow (and therefore pay interest on).
For example instead of saving $120,000 and borrowing $480,000 for a $600,000 house (loan ratio 80%), borrowers might only need to save $30,000 now. But their home loan will then be $570,000 (loan ratio 95%) — and they will have to pay interest on the higher amount.
Also the scheme operates on a first come first serve basis. For borrowers who haven’t yet saved their 5% deposit, they may find that by the time they do, there are no longer any loans under the scheme which are still available. In this case they might have to pay LMI, and then if their circumstances change, they might find themselves in a vulnerable position.
Another issue is that while it’s well and good that first home buyers can buy for up to $700,000 in Sydney under the scheme, a single income of $125,000 p.a. plus super may not be sufficient to service/ qualify for the required loan, so that’s an inherent flaw in the scheme too.
And lastly, the extra 10,000 buyers in the market could also raise prices for properties that are within the scheme’s price limits over the next few months. Together with rushed decisions on where to buy and how much to buy for, participants in the scheme may find that they don’t generate much capital growth in the early years of holding their properties. Time will tell.
Where can you apply?
If this first home loan deposit scheme interests you we can check your eligibility and then assist you in securing your relevant approval. Call or email if we can help in any way.
Long Property blog content provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
