In late 2019, the Federal Government announced their First Home Loan Scheme. The Scheme came into effect on 1 January 2020 and has been put in place to assist first home buyers to enter the property market by underwriting their loans.
While the Scheme will help to speed up the home purchasing process for many young people and those buying for the first time, there are a few things to watch out for.
How will first home buyers benefit from the Scheme?
The Federal Government’s aim is to help first home buyers get a foot on the property ladder sooner and with less money upfront. Generally, lenders want to see that borrowers have saved at least 20% of the cost of their purchase to avoid paying Lenders Mortgage Insurance. Under the scheme, first home buyers who have a minimum 5% deposit saved will have Lenders Mortgage Insurance waived, as the government will effectively guarantor the loan.
First home buyers who are actively saving are often kept out of the property market because by the time they have saved a 20% deposit property prices have risen, keeping that dream home just out of reach. Individuals or couples caught in this seemingly perpetual situation should be able to break that cycle sooner.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a type of policy that protects the lender if the borrower is no longer able to service their mortgage. With the job market being particularly unstable due to COVID-19, Lenders Mortgage Insurance is now more important to a borrower than ever.
Usually, to avoid taking out Lenders Mortgage Insurance, a borrower would need to have saved at least 20% of the purchase price of the property, however, this figure may change depending on the lender.
With the government underwriting home loans for those eligible under the Scheme, first home buyers can save around $10,000 (although some sources cite this figure as being closer to $30,000). The exact savings will depend on the policy, the value of the property and other conditions that are specific to your home loan.
What is the eligibility criteria?
There are a number of criteria to meet to be eligible for the Scheme, and these will vary depending on where you live.
To apply for the Scheme you must be:
- over the age of 18;
- an Australian citizen; and
- earning less than $125,000 per year as an individual or up to a combined $200,000 per year as a couple.
A ‘couple’ only refers to those who are in a de-facto relationship or married. It does not include friends, siblings or other family members.
Most importantly, to be eligible for the Scheme, you must be able to prove that you have actively saved at least 5% of the property purchase price.
Is there anything first home buyers need to be mindful of?
While the government has opened up 10,000 new places for support as of 1 July 2020, there are approximately 110,000 first home property purchases made each year. So not every applicant will be successful in gaining a place in the Scheme.
Changes to your home loan
If you do take advantage of the Scheme but down the track, you refinance your loan, you will need to take out Lender’s Mortgage Insurance if your balance remains above 80% of the purchase price.
Most importantly, you will need to remain living in the property for it to be guaranteed by the government. If you choose to rent the property out and while still owing more than 80% of the loan, you will be required to start paying Lenders’ Mortgage Insurance.
Not all lenders are on board with the Scheme, so you may be limited in who you take your home loan out with. This may also mean missing out on discounted rates that lenders offer to those who have a larger deposit.
Interest and timing
Borrowing a large amount with only a small deposit means the mortgage will be larger and potentially longer and this usually equates to more interest being accrued. Every person’s situation is different, but if you can afford to save more than a 5% deposit, you should consider your options and how this may enhance your financial position in the long term.
Can I take advantage of early access to superannuation in conjunction with the Scheme?
In March 2020, the Federal Government announced a plan to allow eligible applicants early access to their superannuation (capped at $20,000 across the 2020 and 2021 financial years) as a means to assist those who were facing financial hardship due to COVID-19.
While it may be tempting to access your superannuation to form your home deposit, you will be required to prove that you have been actively saving and a lender may look unfavourably on the instant boost to your deposit, as opposed to a clear pattern of putting money away each week, fortnight or month.
Accessing your superannuation as part of the early release incentive is a highly personal decision that should be considered at length, potentially with the assistance of a financial advisor.
If you have made voluntary contributions to your superannuation you may, however, want to consider the First Super Saver Scheme. Eligible applicants are able to draw upon the contributions they have made in order to obtain the 5% deposit needed to make a property purchase. This is viewed as active savings as the money has been consciously set aside. The First Super Saver Scheme is capped at $30,000 for singles and $60,000 for couples.
For more information about the First Home Loan Deposit Scheme, we recommend you speak to a mortgage broker at Preston Finance and Insurance or give one of our conveyancers a call.