The First Home Loan Deposit Scheme is an initiative by the government to help first home buyers get into the property market earlier by essentially reducing the deposit required to get a mortgage with no Lenders Mortgage Insurance (LMI).
The scheme allows first home buyers with deposits as low as 5% to get a home loan without paying any LMI which based on average purchase prices in the capital cities can save you anywhere between $10,000 and $40,000 in LMI.
How do I qualify?
There are several eligibility criteria in order to qualify for the first home loan deposit scheme:
- A minimum deposit of at least 5% is needed.
- Single first-home buyers earning up to $125,000 p.a. or couples earning up to $200,000 p.a. are eligible.
- The value of homes that can be purchased under the scheme will be determined on a regional basis, reflecting the different property markets.
- The scheme will initially only be available to 10,000 borrowers a year which is only around 10% of the total number of Australian who purchased their first home in 2018.
The full details and eligibility criteria are yet to be announced but we do know that the scheme is modelled after New Zealand’s own first home buyers scheme called the Welcome Home Loan which has been in effect since 2003.
How does the new first home buyer scheme work?
Finding the deposit for your first home can be a real struggle, with most lenders currently requiring a minimum 20% deposit to avoid LMI.
It can take nine to ten years for an average household to save that deposit.
With this scheme, if you’ve saved up at least 5% of the property value the government will essentially guarantee up to 15% so you can avoid the cost of LMI and enter the property market sooner.
So, instead of having to insure your home loan with a lenders mortgage insurer and paying a hefty fee, the government will guarantee any shortfall in your deposit and basically act as the mortgage insurer for your home loan.
The new first home buyers’ scheme is slated to come into effect by January 2020.
How much am I saving in LMI with this scheme?
Your actual savings in LMI will be based on your deposit, the loan to value ratio (LVR) and your home loan amount.
Think of it this way, the lower your deposit is, the higher the risk is to the bank leading to higher LMI premiums.
For example, a first home buyer looking to buy in Sydney where the median price is $830,000 as of April 2019 with a 5% deposit, can save anywhere between $32,000 and $36,000 approximately in LMI depending on the lender’s mortgage insurer.
However, if you were to put up a 10% deposit, the LMI range goes down significantly between $17,000-$18,600.
Similarly, in Melbourne, where the median price is $660,000 as of April 2019 with a 5% deposit, you’re saving anywhere between $28,000 and $31,700 approximately in LMI.
You can use our LMI calculator to work out exactly how much you’re saving.
What are the pros and cons of the first home loan deposit scheme?
- The government guarantee saves first home buyers with low deposits tens of thousands in LMI.
- First home buyers can buy their first home sooner and enter the property market due to the required deposit of only 5%.
- Your mortgage repayments will go towards paying off your home loan instead of on rent.
- Along with other first home benefits such as the first home owners grant (FHOG) and the stamp duty exemption/concessions, the deposit scheme may incentivise first home buyers at the fringes to finally buy their own home.
What are the pros?
What are the cons?
- Buyers with low deposits will pay extra in interest over the life of the loan term than buyers with a 20% house deposit.
- The scheme is limited to only 10,000 borrowers a year or roughly 10% of first home buyers from 2018.
- 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.
- 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 other options are available if you missed out on the scheme?
- A guarantor home loan allows first home buyers to borrow up to 105% of the property value with no LMI.
- 100% waived or no LMI home loans are available for doctors and selected medical professionals.
- 90% waived LMI home loans for selected industry professionals like accountants, lawyers, mining specialists, professional athletes and high net worth individuals.
- 85% home loan with no LMI and no guarantor for borrowers in a strong financial situation with a clear credit history.
Even if you don’t fit into any of these categories, there are some lenders that can lend 95% plus lenders mortgage insurance which means that you can buy a home with a much smaller deposit.
You don’t have to wait for the scheme to come into effect.
Speak with one of our specialist mortgage brokers by giving us a call us on 1300 889 743 or
by filling in our easy online enquiry form to find out if you qualify for a low deposit home loan.