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The Government’s First Home Buyers 2020 Deposit Scheme
The Government has announced a new scheme to help people enter the Homeowners market for the first time. Under the Scheme, the Government will offer low – middle-income earners the chance to purchase their first home with a deposit as little as 5%. It is set to start on the 1st January 2020.
The Grant will be available to couples with a taxable income up to $200,000 per year and $125,000 taxable income for singles and will apply to Owner-occupied loans on a principal and interest basis.
How does it work?
To find out if you are eligible for the Scheme you must submit an application to the National Housing Finance and Investment Corporation (NHFIC) and demonstrate your eligibility. If you are approved for the Governments Scheme, you then can apply to the banks for the Loan, with the Government acting as your “Guarantor”. However, the financial lender will still go through all of their normal finance & eligibility checks ensuring you meet satisfactory financial standards.
Lenders generally require a deposit equal to 20% of the properties purchase price in order to avoid paying for Lenders Mortgage Insurance (LMI). However, this scheme allows people who are unable to reach the 20% deposit threshold to still obtain the required finance with as little as a 5% deposit. The Government will also underwrite the loan, so borrowers don’t have to pay LMI.
If you take out a home loan under the scheme, then you will receive support for the duration of the loan. However, if you refinance the mortgage you will no longer be eligible for any support. Additionally, if you refinance your home you will still owe more than 80% of the property’s value as well as most likely have to pay the fee for the lender’s mortgage insurance (LMI) with the new lender.
Are you eligible?
Eligible candidates will be able to access the scheme to purchase an ‘entry-level’ property. The Government hasn’t set a maximum value for the properties purchased as they will be price capped by the cities/regional towns and surrounding areas median price value.
Not all properties will be eligible to purchase under the Government’s Scheme. The Scheme will only be eligible to ‘entry-level’ properties (This excludes high end & overpriced/valued properties) and although there is no maximum price for properties, your purchase eligibility will be capped and subject to the cities/towns surrounding areas average selling price/value.
Senator Cormann confirmed “The price caps are calibrated to take into account the area’s median house price and conditions in the current markets. There is no set number of guarantees per jurisdiction, it will be on a first-in best-dressed basis… Ultimately the scheme will be driven by demand, of up to 10,000 guarantees a year.” The price thresholds will also apply to cities with a population of 250,000 or more.
The Risks!
There are risks one should consider when taking out a loan with a smaller deposit: The owing amount will be considerably larger, as a result, the mortgage term would be elongated. Generally, the maximum loan term is 30 Years, with a minimal chance of that term being extended. Potentially leading to the mortgagee’s minimum repayments being greater. This means that a mortgage taken out under the government’s 5% deposit scheme could put more pressure on borrowers and make it harder to pay back a home loan.
Another disadvantage of the first homeowner’s government scheme is the overall payable interest on the mortgage. The smaller deposit will result in the loans calculated interest is greater. Potentially this will affect borrowers less if they are expecting their earnings to increase substantially during their career, in which the can then increase their loan repayments.
Sources:
https://www.abc.net.au/news/2019-10-27/government-unveils-details-of-first-home-buyers-scheme/11644018
https://www.mortgagechoice.com.au/blog/first-home-buyers/2019/10/the-governments-2020-first-home-loan-deposit-scheme/
https://www.theguardian.com/australia-news/2019/may/13/first-homebuyers-scheme-who-gets-it-and-will-it-work-explainer
