Did you know that it takes four to seven years for the average household to save a 20% deposit for their first home and avoid paying lender’s mortgage insurance? However, a new scheme promises to drastically reduce that time by dropping the required deposit to just 5%.
As you may have seen, the Coalition government recently announced a plan to let first home buyers borrow up to 95% of the value of a property and still avoid paying lenders mortgage insurance (LMI).
Now, the First Home Loan Deposit Scheme “isn’t free money”, points out Prime Minister Scott Morrison, but it means fewer young Australians will need to ask the “bank of mum and dad” for cash upfront.
Why is this a big deal?
Ok, so as it stands, it is possible to get a home loan with just a 5% deposit.
But people with a deposit of less than 20% usually have to pay LMI, which can be a pretty big deterrent if you’re wanting to crack into the market.
Basically, LMI is the insurance that reimburses a lender if a property is repossessed and sold for less than its outstanding mortgage debt.
The insurance covers the backside of the lender, but the premium is paid by the borrower.
Under the new scheme, the government would guarantee the additional amount needed to reach the 20% threshold, which would save borrowers thousands of dollars in LMI.
How much could I save?
Ok, let’s say you want to purchase a $400,000 home to get your foot in the property market.
Currently, if you have saved up $62,000 for the deposit and fees, you’ll have around a 15% deposit. In that case, you’ll pay about $3,500 in LMI.
If you have pulled together a 10% deposit ($42,000 in savings), you’ll be up for $6,500 in LMI.
And if you’ve only put away a 5% deposit ($22,000 in savings), you’ll face $12,500 in LMI.
As you can see, that’s quite a lot of money you’ll be able to save in LMI under the new scheme.
The government’s policy in a nutshell
We’ve gone through the government’s policy and pulled out some of the more relevant tidbits. They are as follows:
– The scheme will commence on 1 January 2020.
– Eligible first home buyers can’t have earned more than $125,000 in the previous financial year, or $200,000 for couples (and both need to be first home buyers).
– The First Home Loan Deposit Scheme will be limited to 10,000 first home buyer loans each year.
– The lender will still have to undertake the full normal credit check process (meeting all their legal obligations) to ensure that you’re in a position to afford your repayments.
– If the borrower refinances, or the loan comes to an end, the Commonwealth support will terminate.
– Eligible first home buyers will be able to use the scheme in conjunction with the First Home Super Saver Scheme as well as relevant State or Territory first home buyer grants and duty concessions.
Other factors to consider
Keep in mind that having a 5% deposit, rather than a 20% deposit, means that the monthly repayments on your home loan will be larger.
You’ll also likely pay tens of thousands more dollars in interest over the life of a 20-30 year home loan.
That said, this scheme will enable many young Australians to start growing their property portfolio years earlier than they otherwise could have.
And for most people, it will also mean they can save a few years paying rent.
For example, if you’re paying $400 a week in rent while saving for a deposit, that’s $62,000 over three years that could have gone towards the mortgage on your first property instead.
Basically, it’s a decision each prospective first home buyer will need to make according to their own personal circumstances.
If you’d like help cracking into the property market, or know a family member who would, please get in touch.
As we’ve alluded to, lenders will still be required to go through all the checks and balances to ensure a first home buyer has genuinely saved up their deposit and can afford their mortgage.
We’d love to provide you with some helpful tips and techniques to ensure that when lenders look through your accounts in 2020, you’ll be well and truly prepared.