The Government has announced a new first home buyer scheme just days out from the Federal Election.
So how does it stack up in improving housing affordability?
How it works
If you have saved at least 5% of the property value as a deposit, the Government will guarantee up to 15% so you can avoid the cost of Lenders Mortgage Insurance (LMI), which kicks in when borrowing more than 80% of the property value.
Based on average purchase prices in the capital cities, you could save anywhere between $10,000 and $40,000, which sounds great if you’ve spent the fast few years squirreling away your savings.
Interestingly, Scott Morrison’s first home buyer loan is one of the few schemes that has support from the Opposition.
The problem is there’s a catch.
The government guarantee will be subject to:
- Borrowers earning no more than $125,000 a year (or $200,000 for couples).
- The value of the property being purchased.
- The property location.
On top of this, the incentive is only open to 10,000 borrowers a year, which is only around 10 per cent of the total number of Australians who purchased their first home in 2018.
We believe the scheme does not go nearly far enough to solve housing affordability for first-time buyers.
Is it an election stunt? I guess we’ll find out when the full details are released and if they decide to open it up to more than 10,000 borrowers a year.
Will low deposit holders stretch themselves thin?
There is a risk of borrowers ending up in negative equity, which is where the outstanding balance on a mortgage is greater than the property value.
That’s because the scheme is essentially encouraging people to borrow at a high Loan to Value Ratio (LVR) because the government guarantee allows you to avoid the cost of LMI.
Borrowers still need to meet serviceability requirements but is there a risk of widespread default if property prices continue to fall as they have been in some markets around the country?
On the flip side, some economists have also argued that this new incentive will further drive up demand for real estate, which will lock out first home buyers who don’t qualify for the scheme.
What is the real solution for first home buyers?
The government should look at:
- Opening this scheme up to more than 10,000 borrowers each year.
- Looking at other solutions to help first home buyers with a small deposit as this is what holds them back.
- Encouraging more housing supply which, in turn, creates affordable options for home buyers.
- Improving infrastructure so it is more viable to purchase outside of metro locations where prices are generally higher.
What are my options right now?
Have you heard of a guarantor loan?
This is where your parents provide a guarantee using their property, allowing you to borrow 105% of the property value with no LMI.
It’s not for everyone but it’s a good option to help some first home buyers to get into the market.
Why should LMI matter to first-time buyers?
If you are borrowing 95% of the property value, most lenders will not allow you to add the cost of LMI on top of your home loan.
That means if you have to pay $10,000 – $40,000 in LMI then you need to have a deposit much larger than the 5% you thought you needed.
Luckily, there are some lenders that can lend 95% plus mortgage insurance which means that you can buy a home with a much smaller deposit.
Don’t wait for the election result!
Call us on 1300 889 743 or fill in our easy online enquiry form.
We can provide a free assessment so you know exactly where you stand with your home loan borrowing power.