News

2020 First Home Loan Deposit Scheme

2020 First Home Loan Deposit Scheme

The Australian Federal Government launched an initiative to assist people in entering the real estate market for the first time by underwriting home loans for first home buyers. The new government scheme for first home buyers allows approved applicants to purchase a mortgage with a deposit as low as 5% and avoid paying lender’s mortgage insurance.

Since January 1, 2020, banks have registered 10,000 potential first home buyers under the First Home Loan Deposit Scheme.

On July 1, 2020, an additional 10,000 first home loan deposit scheme spots with a 5% deposit will be released. This provides potential first home buyers with more time to save for a deposit, gather more information, and learn about mortgage best practices.

The following information can help you understand more about the scheme and become a first-time homeowner.

Key Points:

Start Date: January 1, 2020

Eligibility: Singles with an income below $125,000, couples below $200,000

Minimum Deposit Requirement: 5%

Property Price Cap: Varies by region (see below)

Administrator: National Housing Finance and Investment Corporation (NHFIC)

First Home Loan Deposit Scheme:

The government’s scheme aims to make it easier and quicker for first home buyers to enter the real estate market. The scheme achieves this by allowing first home buyers to purchase a home loan with a deposit as low as 5% while avoiding lender’s mortgage insurance (LMI). Most banks and lenders require borrowers to contribute at least 20% of the property value as a deposit to be exempt from LMI. This scheme enables first home buyers who haven’t reached that threshold to secure a loan if they have 5% of the value of the purchased property. The government acts as a guarantor for the loan, eliminating the need for borrowers to pay LMI.

How does it work?

You need to apply to the scheme’s administrator, NHFIC, and prove your eligibility. If approved, you can obtain a home loan with a lender, and the government will act as your guarantor. While your lender will still conduct regular checks on your financial situation, obtaining a loan will be easier without the need to save a 20% deposit.

Typically, if a lender decides to approve a loan with a deposit less than 20%, they require the borrower to pay what is known as lender’s mortgage insurance (LMI). This is an insurance purchased by the lender to mitigate the risk of the borrower defaulting on the mortgage. Since the government serves as the guarantor for the loan, the bank doesn’t need to purchase insurance. LMI can be quite costly, depending on the size of the deposit, loan amount, and the lender’s terms. The government states that you can save approximately $10,000 in LMI, but the actual savings depend on the specifics of your loan. Additionally, if you had previously planned to save a 20% deposit, you wouldn’t need to pay LMI regardless.

If you obtain a home loan under this scheme, you will have support throughout the loan term. However, if you refinance your home, you will no longer be eligible for the support. Similarly, if you refinance your home but still owe over 80% of the property value, you may need to pay the cost of lender’s mortgage insurance to the new lender.

Benefits:

The government’s deposit scheme can also be used in conjunction with the First Home Super Saver Scheme. The Super Saver Scheme allows homebuyers to withdraw voluntary contributions made to their superannuation fund and use that money towards a mortgage for real estate. Therefore, if you voluntarily make contributions to your superannuation (up to $15,000 per financial year), you can access that money to take advantage of the 5% deposit incentive provided by the government. The limits for withdrawals are $30,000 for singles and $60,000 for couples.

Risks:

There are risks associated with obtaining a loan with a smaller deposit since the amount owed will be higher. This means your mortgage will likely last longer. The standard maximum loan term is 30 years, and your mortgage cannot exceed that period. However, if you want to obtain a larger loan within the same loan term, your minimum repayment amounts will need to be larger. This means that a mortgage obtained through the government’s 5% deposit scheme may impose greater financial pressure on the borrower, making it more challenging to repay the home loan.

Another drawback of the government’s homeownership scheme is that borrowers will have to pay a higher total amount of interest over the loan period. Due to the smaller deposit, the amount on which interest is calculated will be larger. If borrowers anticipate significant increases in income throughout their careers, this may have a smaller impact on them as they can accelerate the repayment of the loan. However, lenders may charge additional fees for extra repayments on fixed-rate home loans that exceed the fixed annual limit.

Am I eligible to apply?

The scheme is open to individuals with an annual income below $125,000 and couples with a combined annual income below $200,000. To be eligible, first home buyers must demonstrate that they have saved at least 5% of the value of the property they intend to purchase.

The government also limits the number of supported homebuyers to 10,000 per year, which means only a relatively small number of people will benefit from it (over 110,000 first home purchases were made nationwide in 2018).

Not all properties are eligible for purchase under the government’s homeownership scheme. The scheme will only provide loans for “entry-level properties” and excludes high-value properties. There is no fixed maximum value for eligible properties as the price cap will depend on the local market of the property. You will need to check the property price cap for your area.

How do I apply?

The scheme will be administered by the National Housing Finance and Investment Corporation, and applications will need to be submitted through that agency.

Other policy supports:

If you are not eligible for this scheme, there are other ways to help you continue entering the real estate market. First Home Owner Grants are subsidies established by individual states and territories to assist with the upfront costs of purchasing a first home. However, please note that each state has different rules and restrictions, and the amount borrowers can access may also vary.

Read More >>